Recently the Reserve Bank of India released statistical data relating to Weighted Average Domestic Term Deposit rates and also Weighted Average Lending Rates of banks.
A weighted average interest rate is an average that is adjusted to reflect the contribution of each loan to the total debt (or each deposit to the total deposits). The weighted average multiplies each loan’s interest rate by the loan balance and divides the sum by the total loan balance. Each loan’s interest rate contributes to the weighted average in proportion to the loan’s percentage of the total debt. Weighted average rate provides a better tool to measure rate of interest than simple average rate.
The lending rates for outstanding loans as well as for fresh loans are based on weighted average. There are separate rates for public, private sector and foreign banks.There is also a rate provided the entire Scheduled Commercial banks.
The term deposit rates (weighted) have been released for the period March 2013 to June 2021 month-wise. The loan rates (weighted) for new facilities have been provided for the period September 2014 to June 2021. The loan rates (weighted) for outstanding have been provided for the period February 2012 to June 2021. This data helps us analyse how the rates (deposit and lending) moved from September 2014 to June 2021.
For September 2014, weighted average rate for outstanding term deposits were: For PSBs — 8.72 per cent, for private sector banks — 8.86 per cent and for foreign banks — 7.63 per cent. On the whole, for all scheduled commercial banks it was 8.70 per cent.
For June 2021, weighted average rate for outstanding term deposits were: PSBs — 5.24 per cent, private sector banks — 5.39 per ent and foreign banks — 3.19 per cent. On the whole, for all scheduled commercial banks it was 5.17 per cent.
Hence, we can see a reduction of 3.53 per cent in monthly weighted average term deposit rate for all scheduled commercial banks between September 2014 and June 2021. From the entire data set released, we can also observe that private sector banks pay a bit more for their term deposits. Foreign banks always pay far less than their domestic counterparts.
However we can observe that the weighted average lending rates on the outstanding loans for all scheduled commercial banks have gone down from 11.90 per cent to 9.10 per cent, a reduction of 2.80 percentage points.
For the new loans sanctioned, we observe the following: In September 2014 the weighted average rate for fresh loans was 11.52 per cent which has gone down to 7.80 per cent in June 2021, a 3.72 percentage point reduction.
When the weighted term deposit rate is reduced by 3.53 percentage points, for existing loans it was reduced by 2.80 percentage points and for new loans by 3.72 percentage points.
This simply shows that full reduction on deposit rate was not passed on to the borrowers. Alternatively depositors are penalised more than what has been passed on to the existing borrowers. Banks use the reduction of deposit rate to solicit new borrowers instead of passing on the benefit to existing borrowers.
The reduction in the interest rate of term deposit has also to be analysed based on the inflation rate which has eroded the value of the rupee over the years. So what you could buy for ₹100 in 2014, would cost you ₹143.28 in 2021.
The benefit to the borrowers is more than what is revealed in these statistical data if inflation rate of 4.6 per cent is taken into account. Similarly, the reduction endured by depositors is much more if the rupee’s erosion is taken into account.
On the whole, depositors are penalised to enrich borrowers.
The writer is a retired banker