Lending rate benchmarks (or base rates) of banks are expected to be responsive to monetary conditions, according to Anand Sinha, Deputy Governor, RBI.
Speaking at the launch of IDBI Bank’s online portal for selling Certificate of Deposit, Sinha said the banking system is supposed to be responsive to monetary conditions, and to that extent the RBI would like banks to respond by adjusting their base rate (read: effect a cut).
As the situation obtains now, banks are only lowering the spread over their base rates in response to RBI’s accommodative monetary policy stance. This move benefits only the new borrowers.
After the RBI cut the minimum amount of investment that banks need to make in Central and State government securities to 23 per cent from 24 per cent of deposits on July 31, State Bank of India cut home loan rate (by up to 60 basis points) and car loan rate (by 50 basis points) even as it kept its base rate steady at 10 per cent.
Banks reluctant to cut
Banks have been reluctant to cut base rates as they are unable to correspondingly pare deposit rates due tightness in liquidity. If banks cut only the base rate without cutting the deposit rate, their margins will get squeezed.
Sinha pointed out that banks are not able to respond quickly to changes in monetary policy as they carry fixed costs over an extended period of time and need to recover the same. In this regard, the RBI has floated the idea of floating rate deposits among bankers so that the monetary policy transmission is more effective.
The Deputy Governor expressed concern that though the minimum investment size of certificate of deposit was reduced from Rs 1 crore to Rs 1 lakh in 2002, there was not much retail investor interest in this instrument. Unlike fixed deposits, investment in CDs are not subject to tax deduction at source.
The average fortnightly CD issuance by banks has jumped from Rs 16,755 crore in 2009-10 to Rs 38,429 crore in 2011-12.