Following the unexpected 50 basis point cut in the policy repo rate by Reserve Bank of India (RBI) today, India’s largest bank, State Bank of India (SBI) has announced a 40 basis point cut in its base rate to 9.3%. ICICI Bank CEO Chanda Kochhar said that a “large part of today’s cut will get transmitted”, but is quick to add that “it will happen with a lag”. Other banks are expected to follow this demonstration effect.
While the cut is ‘unexpected’, and the industry would be happy (the markets reversed the falling trend today, with the BSE Sensex ending 162 points higher) what seems to be missing in the banks’ reaction to the cut is good finance — and good politics. In this context, three sets of questions for the banking sector.
One, over the past one year, RBI has reduced policy rate by 125 basis points. So, why have commercial banks been dragging their feet to pass this benefit to households? Take any bank and map its base rate. You will find a huge lag. Could it be due to lack of competition? If so, what’s stopping RBI from allowing more banks in the system? Where is the benefit of lower interest rate going? Why is it not coming to consumers?
Two, as the banking regulator, what has RBI done to ensure the transmission of a fall in rates? In the go-go years, when interest rates were rising, the rate hikes for home loans happened within hours, if not days, of policy announcements. Could RBI educate us as to why the return trajectory is so slow, where lies the friction? On this front, it seems the pressure to cut rates is coming more from the government than from RBI.
And three, why has the principle of a transparent base rate as the default benchmark rate for home loans not been extended to Housing Finance Companies (HFC)? Why are commercial banks allowed to float HFC arms and sell loans from there at all? This little fine print is all it takes for the idea of ‘universal banking’ to continue to charge high rates on low costs, pocketing the profit. Both, the RBI and the government, have a role to play here — more the former — to ensure a consumer-first approach to banking.
Profit is good, profiteering on the back of consumers, who are bearing the brunt of inflation on one side and these manipulations of high interest rates on the other, is not — the sooner RBI ends this anti-consumer anomaly in the banking sector, the better. Good finance leads to good economics. But in this case, with a rising middle class, it could also mean good politics.