Going by the yields they have earned on their advances, most top bankers are yet to drop interest rates meaningfully. While the Reserve Bank of India (RBI) has cut the repo rate by 175 basis points between January 2015 and December 2016, a glance at the yields of ten top banks showed, they had not fallen by as much for nine lenders. The country’s third-largest state-owned lender, Bank of Baroda (BoB), saw a 193-bp fall in its yield between December 2014 and December 2016 to 9.08% and is the only one among the top 10 to have seen full transmission through yields. This is partly because BoB’s yield in December 2014 – at 11.01% —was significantly higher than that of its peers of comparable size.
Another large lender from the public sector, Canara Bank, came close to transmitting the entire 175 bps of cuts through its yields. The bank’s yield on advances fell 166 bps during the two years under review to 9.1%. Punjab National Bank has seen the yield drop 152 bps to 8.34% at the end of December 2016.
State Bank of India’s (SBI) yield on advances saw the yield on advances fall 111 bps over the two-year period to 9.46% — the highest among the 10 lenders.
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Transmission through yields was more limited at the three large private-sector banks. ICICI Bank saw a meagre 18-bp drop in its yield on advances since December 2014 to 8.76%, while that of larger peer HDFC Bank fell 60 bps to 10.7%. Axis Bank’s yield on advances dropped 100 bps to 9.3% over the two-year period, according to calculations made by analysts at Kotak Institutional Equities. The bank does not disclose its yields.
During the same period, the yield on the FIMMDA one-year benchmark for AAA-rated issuers fell about 150 bps to 7.1276%. As rates in the money markets fell more swiftly than at most major banks, better-rated corporates chose to tap the markets.
Transmission through yields may be more effective by the end of the current financial year as banks have reduced their marginal cost of funds-based lending rates (MCLRs) by up to 90 basis points since the beginning of the March quarter.
However, the regulator continues to nudge banks towards lower rates. At the RBI’s February 8 monetary policy, governor Urjit Patel had said that while the central bank had reduced rates by 175 bps, banks’ weighted average lending rate had fallen by only between 85 and 90 bps. “I think there is scope for some more transmission. Some of the healthy borrowers, sound borrowers from the housing segment have already been benefited from it,” he had said.
Most banks, however, say that there is little scope for more rate cuts. On February 10, SBI chairman Arundhati Bhattacharya had said, “If you see from the beginning of the rate cut cycle, we were at 10% at that time and today we are at 8%. So, our MCLR cut has been a 200 bps. RBI, since the beginning of the cycle has cut only 175 bps. So we are ahead of RBI in the cuts,” adding, “So therefore at this point of time it seems unlikely unless there is some sudden change of situation which I am not able to envisage right now. But, we will keep monitoring and whatever is warranted, it will be done.”