If it wasn’t bad enough that the government is chasing corporates for what it considers profiteering—by not passing on cuts in GST rates—the Supreme Court (SC) wants RBI to examine whether or not commercial banks were passing on the benefits of repo cuts to all customers. It is, of course, ironic that this directive should come at a time when the interest cycle is turning and RBI is likely to start raising repo rates. But, more importantly, the SC’s direction implies that all banks, whether government- or privately-owned, are acting in concert to gouge the customer. Indeed, according to the Moneylife Foundation, whose petition RBI was reacting to, banks benefit by Rs 10,000 crore for every 1% cut in rates that they do not pass on to consumers.
Nor is it just Moneylife that feels this way. RBI set up a study group under the chairmanship of Janak Raj in September 2017 that made much the same point of banks using various methods to not pass on repo cuts to customers and, within a few months of this, deputy governor Viral Acharya delivered a lecture on this tendency of banks to not pass on rate cuts and to discriminate between customers. During the, then, current cycle of cutting repo rates—from December 2014 to October 2017—Acharya said that, while the repo was cut 200 bps, the ‘base rate’ of banks fell just 80 bps. And, after the introduction of MCLR in April 2016, he said, the repo was cut by 50 bps between April and October 2016, but the ‘base rate’ was cut just 20 bps—indeed, RBI moved from the prime lending rate (PLR) in 1994 to benchmark PLR (BPLR) in 2003, the base rate system in 2010 and the MCLR in 2016 to ensure customers got more benefits. As Acharya said, 30% of outstanding loans are still linked to the ‘base rate’ instead of MCLR and banks tended to pass on greater cuts to new customers instead of to existing ones.
The problem with linking repo to lending rates, however, is that banks get a very small proportion of their funds from RBI at the repo rate. Over 36% of deposits are of more than two-year tenures, so, even if rates were to fall after a repo cut, these loans don’t get re-priced immediately; naturally then, it is easier to pass on cuts to new customers. Two, as Acharya himself shows, a lot has to do with liquidity—so, when the repo was cut by just 25 bps in the post-demonetisation period of November 2016 to October 2017, the weighted average lending rate fell by 64 bps and that for fresh loans by 95 bps. Banks, like any other business, factor in demand and supply conditions as well as rival products—if they lend at a higher rate than the bond market for top-rated corporates, borrowers will switch; that is why top corporates get a better deal. The fact that banks need to keep savings rates high due to political pressure as well as competing small savings products—Acharya slammed banks for not cutting savings deposit rates even as repo rates were cut—is also ignored by those asking for repo rates to be immediately translated into lending rates, as is the fact that, at a time when NPAs are high, banks also need to add these on to the cost of funds; high mandated priority sector lending or creation of loss-making Jan Dhan accounts add to costs. As the regulator, RBI is within its right to nudge banks to move as many customers to MCLR as possible, but looking for a one-to-one relation with the repo is unfair and illogical. And SC directing RBI to investigate the matter displays a lack of knowledge of banking, and is tantamount to interfering in business practices—will it look into telecom pricing next?