Good news in this year was two rounds of rate cuts by Central Bank. Whereas, the bad news is that inspite of rate cut there is no reduction in lending rate by banks. What is the reason that banks are not making any reduction in the rates?   

When bankers were asked about the reason behind this, they pointed their finger towards Reserve Bank of India’s new guidelines on the base rate. When banks applied the revised RBI’s formulae on base rates, lending rates were going high. Banks have to factor in the cost of the deposit bucket that has the largest share to factor the average cost of funds to set the base rate.

As for now, banks set the base rate taking into account the deposit rate of any one bucket such as for 1-14 days, 15-30 days, and so on of their choice. Due to this, bankers are able to manipulate the base rate to protect their bottom line. Bankers highlighted that the bucket that have the highest rate attracts higher deposits. If bankers choose this bucket then the cost of deposits will be highly increased which in turn will make it difficult for them to reduce the rate.

In this regard, bankers overlooked the option of taking the average cost of funds for calculating the base rate. Bankers are very quick when the rates are to be raised. However, when the situation is vice versa, the bankers find some or other way to show that passing of rate cut benefit to their consumers is not possible. Though RBI has reduced its key policy rates by half a percentage point since the start of this year but still no benefits has been passed to the customers.

There are many policies and rate cut which benefits the higher level but we, common people, are still waiting for such policy whose benefits will pass on to us. However, the question as always remains the same- Will the rate cut benefit ever be passed on to common people?