MUMBAI: Banks and home finance companies have been showcasing how they have passed on the lower cost of funds to borrowers. While the numbers are true, there’s more to it than meets the eye: the rate cuts have benefitted only recent customers and not older ones because most loans are still linked to the previous benchmark known as the base rate and not the new Marginal Cost of Funds based Lending Rate (MCLR).
In the past 12-18 months, Indian banks haven’t passed on the bulk of benefits arising out of falling deposit and wholesale rates to borrowers, US equity research firm Jefferies said in a recent report titled, “Banks Penalising Honest Borrowers -Is It Time for Change?“ “State-owned enterprise banks have used this strategy largely to compensate for the lost income on non-productive back-book assets (NPAs, restructured loans), allowing private banks to enjoy better pricing power and NIMs (net interest margins),” New York-based Jefferies said.
The trio of Oriental Bank of Commerce (OBC), Bank of India (BoI) and Punjab National Bank (PNB) has been the worst in transmitting the lower cost of funds to base-rate borrowers. According to Jefferies, since May 2015, OBC has not transmitted the almost 100 basis points change in its 1-2 year deposit rates and both BoI and PNB have not passed on the almost 90 bps change in deposit rates.
While State Bank of India, the country’s largest lender, has not passed on the 75 bps cut in its 1-2 year deposit rates, ICICI Bank and Axis Bank have not transmitted the reduction of 60 bps and 55 bps, respectively , in their deposit rates.
Rate transmission has worked better under the MCLR regime, under which several banks have passed on the bulk of the deposit rate cuts to borrowers. According to Reserve Bank of India guidelines, loans sanctioned and credit limits renewed from April 1, 2016, should be priced based on MCLR.Some banks have put the onus on the borrowers.
“It is for them (base-rate borrowers) to see, not for us,“ said Usha Ananthasubramanian, MD of PNB. “There are some borrowers who stick there (base rate) if they come to MCLR the rates remain the same for a year. Some people believe it is better to be in base rate, so it is a demand from the side of customers.“
“MCLR has been cut, home loan rates have been cut,“ said Chanda Kochhar, MD of ICICI Bank. “ All borrowers have the option to move to MCLR.“
Analysts said banks have unjustly penalised good borrowers to compensate for losses resulting arising from non-performing assets. “Base rates for banks have come down by ~50bps in the last 18 months, while the average cut in 1-2 year deposit rates is ~120bps,“ Jefferies said. “Given that most borrowers in pre-MCLR era would still be tied up to base rate (~50% of loans) implies spreads on performing back-book have been artificially kept higher.“
PNB’s one-year MCLR stood at 9.25% compared with its base rate of 9.6%. ICICI Bank’s one-year MCLR was 8.95% while its base rate was 9.35%. For SBI, the oneyear MCLR was 8.9% compared with its base rate of 9.3%.
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