With State Bank of India (SBI) paying 10 basis points less on one-year term deposits from the beginning of September, the interest that the bank pays on such deposits have dropped 135 bps to 7.15% from the beginning of the calendar year 2015.
During this period, the Reserve Bank of India (RBI) has cut its benchmark policy rates by 150 bps.
On the other hand, when it comes to lending rates, SBI has cut its base rate by just 70 bps during the same period.
This, however, is not just the case with SBI. The reduction in the deposit rates of several large banks have been much more – in some cases more than twice – the reduction in their lending rates.
While the interest rate on one-year deposits at Punjab National Bank (PNB) has dropped by 170 bps – from 9% to 7.3% – since the beginning of CY15, its base rate has dropped by just 65 bps during the period – from 10.25% to 9.6%.
Disappointed with such lack in transmission in lending rates, the RBI has mandated banks to adopt the MCLR from the beginning of the current fiscal.
Earlier, under the base rate regime, banks had the freedom to calculate cost of funds either on the basis of average cost of funds or marginal cost of funds or any other methodology, allowing them to delay/avoid passing on rate cuts by the central bank to borrowers. However, while MCLR is also primarily a function of cost of funds, it takes into account only marginal cost of funds.
Marginal cost of funds is nothing but a sum of the products of the rates offered for deposits/borrowings of various kinds and their outstanding balance on a bank’s books.
The other differentiating feature of MCLR vis-à-vis the base rate is the fact that while the latter was uniform for loans of all tenures, the RBI has mandated banks to announce MCLRs of at least five tenures – overnight, one month, three month, six month and one year. Simultaneously, it has allowed banks to add a tenure premium to each MCLR.
However, even the adoption of MCLR hasn’t seen significant transmission. SBI’s one-year MCLR is just 20 bps lower than its base rate. PNB’s one-year MCLR is just 25 bps lower than its base rate.
Criticising banks for not fully passing on benefits of lower interest rates to borrowers, despite implementation of the MCLR, the then RBI governor Raghuram Rajan had in August said despite easy liquidity, banks have only modestly passed past rate cuts to borrowers.
“Earlier, some bankers said it was the lack of liquidity that was holding rates high, now I hear from some that it is fear of the FCNR(B) redemption that is making them reluctant to cut rates. I have a suspicion that some new concern will crop up once the FCNR(B) redemptions are behind us,” Rajan had said at the third bi-monthly monetary policy meeting in August.