Ind-Ra believes that the policy cycle is being used by banks to their advantage. A study of the last 10 years shows, that in most cases when policy rates have reduced, deposit rates have comedown faster and the quantum has also been higher compared to lending rates. The same was also true when policy rates were hiked, where lending rates went up and the quantum was also higher compared to deposit rates.
In the recent policy cycle, RBI has cut policy rates since January 2015 by a cumulative 125bp, banks have cut one year deposit rates by an average 130bp and lending by 50bp, which includes the base rate cuts in the last one week. Base rate is the rate below which a bank cannot lend. In the last 18 months three-month commercial paper and certificate of deposit rates have fallen by 150bp. Thus transmission of policy rates has been more through market rates and banks deposit rates in the last one year.
In certain cases while base rates have been reduced by banks, spreads have been increased, netting out part of the benefit to the consumers. Some banks have cut lending rates, to a larger extent for new customers and not as much for their existing customers, while charging existing customers if they wish to switch to the lower rates.
Bankers have been reluctant to transmit the entire policy rate cut to borrowers and have sought a reduction in the interest rates on small savings schemes on fears of flight of cash from bank deposits to such schemes. This has been one of the major impediments for the lending rates being higher believe bankers, however transmission on the deposit side has been fully passed through and in most cases banks deposit rates are lower than rates offered by most small saving deposit schemes like Public provident fund (PPF), national savings certificate (NSC) etc.
Ind-Ra notes that in the last decade small saving deposit schemes have offered rates between 8-9.3% unrelated to the up-cycle or down-cycle in policy rates. These rates are also politically sensitive since a bulk of this saving is made by elders, farmers and low income groups. In fact in 2009 when repo rates were at a low of 4.75%, PPF and NSC both continued to offer 8% return and in 2012 when the repo rate moved up to 8.5%, PPF offered 8.8% and NSC offered 8.6% return. Repo rate is the interest rate at which the RBI lends to other commercial banks.
The funds raised under the small saving schemes are significantly lower than the amount banks raise from term deposits. However in times of rate differentials, retail investors shift from investing in term deposits to small savings schemes to take advantage of the higher rates. As evident from the 2.7x yoy increase in the amount of securities issued against small savings schemes in FY15 (INR3.33bn), and the 12.5% dip in the amount banks raised from term deposits (INR7.9trn).
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Ind-Ra strongly believes there is a clear aberration in monetary transmission which needs to be corrected so that the lower interest rates get passed on to borrowers. This is particularly imperative in the current scenario, to support demand recovery through capex and discretionary spending.
While the central bank is likely to be accommodative, this stance is unlikely to benefit the end consumers unless there is better transmission. Ind-Ra expects the pace of transmission by way of lower lending rates to accelerate in the coming months, given the RBIs focus and the lagged impact of lower rates since January 2015.
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