The RBI assumes what to expect in the transfer of interest rate cuts
The Indian central bank has taken several policy measures to transfer the key rate cuts to banks’ lending and deposit rates more quickly. While some benefits of rate cuts or hikes have been passed on to consumers, there are often several factors that get in the way.
The RBI has now listed a few reasons in its current bulletin.
A larger share of fixed-term interest
The banks grant loans based on the deposits they receive from the market. There is a mismatch between assets (loans) and liabilities (deposits) of banks. The fixed-term deposit rates are generally fixed for a longer period of time, for example 3 to 5 years, and do not change with the changes in the repo rate, which are checked every two months by the RBI.
While the banks’ loans are linked to the variable interest rates and changes due to the changes in the repo rate. This creates mismatch and often delays the transmission of a rate cut to borrowers.
Previous loans assessed under the older systems
Bank loans such as home loans have longer terms of 15 to 20 years. In the past two decades, many benchmark interest rates have been predominant, such as the benchmark interest rate (BPLR), the base rate and the MCLR. These three programs together account for 71.5 percent of the outstanding floating rate rupee loans. The proportion of loans linked to MCLR was 62.9 percent in March 2021. The method of setting interest in older systems was rather opaque. “The opacity of the interest rate setting procedure within the framework of the internal benchmark regime hinders the transfer to lending rates”, it says in its bulletin of the RBI.
Higher government savings rates
The higher interest rates offered by postal savings are also forcing bankers to slowly lower deposit rates. The RBI says that rates on the various small savings instruments, having dropped sharply in the first quarter of last year, remained unchanged in the remaining quarters of 2020-21 and also in the first half of 2021-22.
Higher failure rates
The pricing of bank loans is based on the probable default rates in the loan segments. For example, unsecured personal or credit cards have a higher default rate, but lower that of home loans. Given the economic slowdown over the past three years, bankers’ perception of risk has increased. This translates into a higher risk margin that affects the carryover of interest rates as people are not seeing a significant decrease in lending rates despite the RBI’s key rate cuts.
Different interest rates from NBFCs
The non-bank financial sector, which has total assets of nearly Rs 30 lakh crore, has a different credit pricing strategy. Because they serve a different customer segment that is usually not served by the bank. “While some NBFCs use their own policy rates as an interest rate benchmark, others use bank base rates or MCLRs as external benchmarks; some don’t even have an interest rate benchmark for their loan prices, ”the RBI bulletin said.
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