Private lenders fare better in interest rate transmission

Private sector banks have taken the lead in reducing interest rate on loans in the pandemic-hit last one year, according to a report.

The rate reduction has been more than 100 basis points for private lenders, while the overall lending rates have come down by almost 100 bps, says an Economic Times report, which further said State-run banks have not been far behind.

According to the RBI data, weighted average lending rates for outstanding rupee loans of commercial banks fell 96 bps between March 2020 and October 21.

Private lenders take the lead

For private lenders, however, the fall has been to the tune of 109 bps, for public sector banks the dip is 85 bps and 187 bps for the foreign banks operating in India, the report said.

The Reserve Bank of India has, however, reduced its benchmark repo rate by 115 bps during this one-year period and also enhanced liquidity in the system.

Policy transmission has been faster pace since the pandemic, according to the report, which also said in the 19-month period prior to the onset of the pandemic, the benchmark policy was lowered by 135 bps, but lenders lowered their rates only by 15 basis points between March 2019 and March 20 as reflected in the weighted average lending rates on outstanding loans of commercial banks.

The transmission has, however has been better after the introduction of external benchmark-based pricing of loans, the report said, quoting a research paper by RBI economists.

The research paper further said that the transmission showed improvement since March 2020 on account of rate cuts, and surplus liquidity conditions.

Surplus liquidity

The central bank in response to the Covid-19 pandemic had earlier injected additional liquidity into the system. The surplus liquidity in the system as of October was estimated at Rs 10,000 crore.

The Reserve Bank of India (RBI) has prepared a roadmap to suck out the surplus liquidity by over Rs 5 lakh crore by December.