<div><em><strong>Raghu Mohan </strong>points out that despite a 75 bps cut in the repo rate between January and June 2015, we only saw a 30 bps pass-on by banks</em></div><div> </div><div>A day after the Reserve Bank of India’s (RBI cut the repo rate by 50 basis points (bps) to 6.75 per cent, a clutch of banks went for a trim in their Base Rates (BR) – it ranges between 25 bps and 40 basis. The sharpest were by the State Bank of India and Punjab National Bank (both by 40 bps) to 9.3 per cent and 9.60 per cent.</div><div> </div><div>A reduction in bank BRs after Mint Road’s repo rate cut at first glance seems to suggest that the “transmission effect” is now in full play; that the clogs have been removed. After all, between the last policy and the just announced one, bank BRs (as presented in RBI’s Weekly Statistical Supplement) hardly moved: 9.7-10 per cent from 9.75-10 per cent. At end-March 2015, they were at 10-10.25 per cent levels (the same as in January before the first rate cut). Despite a 75 bps cut in the repo rate between January and June 2015, we only saw a 30 bps pass-on to you and I by banks. Mint Road noted the financial markets have transmitted its past policy actions (lower yields on commercial paper and corporate bonds), but banks had done so only to a limited extent (as in lending rates have been stubborn).</div><div> </div><div>So what’s changed now?</div><div> </div><div>Let’s flashback to September 1 this year when HDFC Bank cut its BR by 35 bps to 9.35 per cent; peers SBI and ICICI Bank held it at 9.7 per cent then. It was a pre-emptive strike by the bank ahead of the festive season, and it had in any case, been reducing its deposit rates over time – it was logical or it would have hit the bank’s net interest margin (NIM) in a big way. HDFC Bank’s rivals held their BR – perhaps in anticipation of a repo rate cut by RBI. What should not be lost sight here is that they did not feel it worthwhile to let go on the NIM front for market share; or in other words did not feel that HDFC Bank will gain much anyway – given the tepid appetite for credit.</div><div> </div><div>M B Mahesh, analyst at Kotak Institutional Equities had said at that point in time that it is not very clear on what the likely response from other banks will be as they need to strike a balance between growth and NIM outcomes.</div><div> </div><div>“Given the lack of growth, we ideally would want banks to cut deposit rates a bit more aggressively as lending rate cuts are unlikely to boost credit demand. The broad outcome of a negative NIM outlook for the sector is slowly playing out but we do not see this as an end. We see it getting worse as we see a weak investment cycle ahead. However, aggressive cut in NIM at a time of slow growth does not achieve the desired objective and only results in more capital consumption, which is counter-productive”, he had explained.</div><div> </div><div>But as Madan Sabnavis, chief economist at Care Ratings says: “The strange part is that banks are letting go on NIMs by not cutting deposit rates aggressively, but are cutting the BR”.</div><div> </div><div>What’s unsaid here is that North Block must have nudged banks cut their BRs. In the hope, it will fire the economy going ahead. What we now have is a situation wherein some bank have decided to take a hit on NIMs (to the extent they have not cut deposit rates). Another way to interpret is that a cut in the BR does not imply they will lend at the publicly declared “rack rate” (there is a mark-up of four per cent over the BR anyway). And there will not be a big hit on NIMs either; that BR cuts (for now) make for great theatre!</div><div> </div><div>Now let’s look at at credit offtake numbers. The increase in bank non-food credit during the financial year so far until September 4, 2015 was Rs 1,57,500 crore compared to Rs 1,12,400 crore during the same period last fiscal.</div><div> </div><div>As Sabnavis says: “While this does indicate an increase, the number is skewed on account of the sharp increase in the credit in the first fortnight of the new financial year, which is between March 20 (the reporting fortnight for considering bank credit for the year) and April 3rd. During this fortnight, the increase in credit was Rs 2,91,500 crore (Rs 79,400 crore), with a large part attributable to the loans taken in the context of the spectrum sale. “Since then, incremental credit has been in the negative zone”, he adds.</div><div> </div><div>It also need to borne in mind that this abysmal credit numbers above had nothing to do with high interest rates. It had more to do with the general downturn in the economy and the overhand of bad-loans on bank books. RBI’s Report on the Trend and Progress of Banking (2013-14; the latest) explained that the consolidated balance sheet of banks in 2013-14 registered a decline in growth in total assets and credit for the fourth consecutive year.</div><div> </div><div>“This decline could be attributed to a variety of factors ranging from slower economic growth, de-leveraging, and persistent pressure on asset quality leading to increased risk aversion among banks and also increasing recourse by corporates to non-bank financing including commercial papers and external commercial borrowings. With both credit and deposit growth more or less same, the outstanding credit to deposit (CD) ratio at the aggregate level remained unchanged at around 79 per cent”. The Report did cite high interest rates for this sorry state of affairs!</div><div> </div><div>It is also unlikely that a mere reduction in interest rates will lead to a spurt in economic activity. Just a few days ahead of Mint Road’s policy meet, India Ratings and Research told us that the capex cycle of the top 500 asset owning corporates (excluding banks and financial services) may be close to bottoming out, but qualified it. “While further downside to capex spending is limited, an immediate meaningful revival of private capex spending is unlikely. Factors such as subdued commodity prices and capacity utilisation levels close to decade lows provide limited motivation to private corporates to take up capex. The high leverage of a large number of corporates may limit their ability to take up even normal maintenance capex”, said Ashoo Mishra, Associate Director at India Ratings.</div><div> </div>
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Raghu Mohan is an award-winning senior journalist with 22 years of experience. He has worked for BW Businessworld since December 2006, and is currently its Deputy Editor. His area of expertise is banking – commercial, investment, and the regulatory. Previous stints include those at The Financial Express and Business India.
