Finance Ministry to monitor rate-cut transmission by public sector banks

The finance ministry is closely monitoring the transmission of monetary policy rates at public sector banks (PSBs) and is collating data on the lending rate cuts effected by banks, following a series of rate cuts by the Reserve Bank of India (RBI), a finance ministry official said.

Sources said the concerns related to slower monetary rate transmission were raised in the 20th meeting of the Financial Stability and Development Council, chaired by Finance Minister Nirmala Sitharaman, on June 19, where all the financial regulators were present. In the aftermath of the meeting, the Department of Financial Services, under the finance ministry, has started collating data on interest rate cuts by PSBs after the RBI’s recent monetary policy actions.

In various rounds of meetings with PSB executives, the finance ministry has emphasised the need to pass on the monetary policy rate cuts to customers. A PSB executive said, “The finance ministry and the RBI want a faster transmission of interest rates.” 

In its June monetary policy review, the RBI had cut the repo rate for the third consecutive time by 25 basis points, or bps (0.25 per cent) since February, leading to a cumulative reduction of 75 bps in 2019. The repo rate — the rate at which commercial banks borrow from the central bank — stands at 5.75 per cent at present.

Following the RBI’s policy action, seven out of 18 PSBs have effected a cut in their lending rates so far. Allahabad Bank, United Bank of India, and Punjab National Bank reduced their marginal cost of funds-based lending rate (MCLR) by 5 bps (0.05 per cent) for all tenor loans.

Further, Bank of Maharashtra reduced its one-year MCLR — the benchmark against which most customer loans such as auto, personal, and home loans are priced — by 10 bps to 8.6 per cent, and for other tenor loans by 5 bps. 

Besides, Andhra Bank, Corporation Bank, and Oriental Bank of Commerce cut its one-year MCLR by 5 bps each.

State Bank of India announced introducing repo-linked home loans from July earlier in June.

Some PSBs, such as Syndicate Bank, and Punjab & Sind Bank, even increased their lending rates. While Syndicate Bank increased its three-year MCLR by 5 bps, keeping the rest unchanged, Punjab & Sind Bank hiked its six-month MCLR by 5 bps, lowering the three-year MCLR to the same extent.

“The one-year deposit rates were consistently going up during the reference period. Fixing the MCLR is based on several factors, which include cost of deposits, operational cost premium — the major consideration being the way our cost structure behaves — and where you want to position yourself. The three-year fund rates in our catchment area were going up,” Syndicate Bank Managing Director and Chief Executive officer Mrutyunjay Mahapatra told Business Standard. Acknowledging that the central bank’s objective is to ensure maximum transmission of rate cuts, he said the bank will likely reduce its lending rates.

RBI Governor Shaktikanta Das had expressed concerns over the slow transmission of interest rates to benefit customers, despite successive policy rate cuts, at the time of announcing a 25-bps repo rate cut on June 6. He had said that a 50-bps reduction in the policy repo rate in February and April 2019 had led to only a 21-bps reduction in lending rates by banks. Acknowledging that the interest rate transmission happened comparatively faster, in two-three months, he also said “this time we expect faster transmission to happen. We also expect complete transmission to happen thereafter”.