In the face of virtual non-cooperation from banks, the Reserve Bank of India (RBI) has decided to maintain the status quo in policy rates, in the first bimonthly Monetary Policy Statement for 2015-16. The “heads I win, tails you lose” attitude of the banks has not really gone down well with the RBI and also the fiscal bosses. The Raghuram Rajan-led >RBI appears to have taken a tough stance . It has every justification to do so. Since the beginning of 2015, the RBI has cut policy rates by 50 basis points in two doses of 25 points each, and that too outside the usual policy cycle. On both occasions the banks had chosen to look the other way without effecting similar cuts in lending rates. They refused to pass on the benefits to customers. This time around when the >RBI kept the rate unchanged , some leading banks such as SBI, HDFC Bank, ICICI Bank and others have reluctantly come forward to cut lending rates, albeit only marginally. It is difficult to fathom the logic behind their behaviour — of the blatant refusal to cut rates earlier and opting for a voluntary reduction in lending rates now. Governor Rajan has time and again referred to the lag in rate cut transmission. Often in the past, banks acted with alacrity in passing on rate hikes to borrowers. When transmitting rate cuts, however, they have taken their own sweet time. Rather, they have used rate cuts to shore up their bottom line. Thus, the twin cuts in rates only served the banks whose collective NPAs (non-performing assets) were a cause for considerable anxiety. With variable loan rates becoming the norm in the banking sphere, the refusal to reset lending rates in line with the RBI policy rate is indeed hurting the cause of borrowers, especially of the retail kind.
The recalcitrant attitude of banks has, predictably, forced the RBI to push for a marginal cost of funds-based computation of their base rate. At the moment, there is no uniformity in the way banks calculate their base rate. They use a combination — of average cost, marginal cost and blended cost of funds — to arrive at their base rate. The RBI feels that marginal cost of funds — which is pegged on the incremental cost of deposits — will reflect the policy rate change better. This is a key takeaway from the so-called “no action” statement of the RBI on Tuesday. With the RBI taking a no-nonsense stand and indicating that any future rate cut will hinge on the pace at which banks passed on the benefits of rate cuts to borrowers, the onus is now on the banking industry to deliver. Banks must do business and be profitable and not strive to be profitable by denying benefits to the borrowers.
