Borrowing rates have not come down is ‘nonsense’: Raghuram Rajan
India’s three major lenders, who control over 60 per cent of banking operations, had to eat humble pie and cut interest rates after giving various reasons at a post-policy announcement press conference as to why they could not cut interest rates immediately. Barely a few hours after they said this, SBI broke rank and cut its base rate by 15 basis points to 9.85 per cent from 10 per cent. ICICI Bank followed a few hours later with a cut of 0.25 per cent points to 9.75 per cent from10 per cent and HDFC Bank cut their prime lending rate to 9.85 per cent.
RBI governor Raghuram Rajan, at his press briefing after announcing his first bi-monthly monetary policy statement 2015-16 on Tuesday, was strident in his criticism of banks not cutting rates specially since conditions were benign for banks to bring down lending rates. He said that they borrow at 7.5 per cent, there is plenty of liquidity (Rs 29,300 crore) in the system, and credit offtake is tepid. The banks’ plea that borrowing rates have not come down is “nonsense.”
(ICICI Bank MD Chanda Kochhar (from left), HDFC MD Bank Aditya Puri, State Bank of India chairperson Arundhati Bhattacharya address the media after the RBI policy announcement in Mumbai on Tuesday. — PTI)
Bankers however said rates will come down but they could not say when and cited a host of reasons like tough competition to get small depositors from small savings, PPS and the government’s Sukanya Samrid-dhi Scheme for pre-teen young girls which is eligible for deduction under Section 80C. Banks also differed with Dr Rajan on his proposal to encourage banks to move towards calculating the base rate on marginal cost of funds as that would make “it more sensitive to changes in policy rates,” which is necessary for monetary transmission to occur.
Bankers said this transition to marginal cost from the present average cost of funds, “will need a long transition as they will have to balance deposit and loan rates.”SBI chief Arundhati Bhattacharya said most of their resources are from depositors and only one per cent is from the market. The banking system, she said, is a “proxy for a security net” as India has no security net. So the banks would have to be careful in the transition.
ICICI Bank MD and CEO Chanda Kochchar said it not just the repo rate change that determines the base rate change, it depends on cost of funds, deposit mix, liquidity situation and also on credit off take.
