With reference to the report, "Why RBI's rate cuts have failed to move banks" (September 8), why are banks, especially the public sector ones, not obliging the Reserve Bank of India (RBI) by cutting interest rates?
One assumption of the RBI's rate cuts is that retail credit is extremely sensitive to interest rate cuts. But this assumption seems to be incorrect. Retail borrowers base their decisions on the ease of borrowing rather than the interest cost. A difference of 0.5 to one per cent does not affect their decision on borrowing as long as they have easy access to retail credit.
Further, the proposed change in the calculation of base rate to marginal cost of funds will not improve transmission of policy rates. Marginal cost has no effect on current and savings deposits (Casa). Banks with higher exposure to Casa deposits ignore the marginal cost on other deposits while those with less exposure to Casa are no doubt vulnerable to marginal cost, but still ignore these because for them augmenting deposits is more important than the cost.
One important aspect that has not been commented upon is the poor asset liability management in most public sector banks. These banks did not bother to balance their liabilities even after noticing that their deposit portfolio was heavily tilted towards high-cost deposits. Branches, where most of the action on mobilisation of deposits takes place, do not take these aspects into account.
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One assumption of the RBI's rate cuts is that retail credit is extremely sensitive to interest rate cuts. But this assumption seems to be incorrect. Retail borrowers base their decisions on the ease of borrowing rather than the interest cost. A difference of 0.5 to one per cent does not affect their decision on borrowing as long as they have easy access to retail credit.
Further, the proposed change in the calculation of base rate to marginal cost of funds will not improve transmission of policy rates. Marginal cost has no effect on current and savings deposits (Casa). Banks with higher exposure to Casa deposits ignore the marginal cost on other deposits while those with less exposure to Casa are no doubt vulnerable to marginal cost, but still ignore these because for them augmenting deposits is more important than the cost.
One important aspect that has not been commented upon is the poor asset liability management in most public sector banks. These banks did not bother to balance their liabilities even after noticing that their deposit portfolio was heavily tilted towards high-cost deposits. Branches, where most of the action on mobilisation of deposits takes place, do not take these aspects into account.
K V Rao Bengaluru
Letters can be mailed, faxed or e-mailed to:
The Editor, Business Standard
Nehru House, 4 Bahadur Shah Zafar Marg
New Delhi 110 002
Fax: (011) 23720201
E-mail: letters@bsmail.in
All letters must have a postal address and telephone number