Indians are yet to fully receive the benefits of RBI’s coronavirus relief measures

India’s central bank wanted to ease the pain for Indians struggling with job losses and pay cuts when it announced a moratorium on loan repayments and slashed its lending rates to record lows earlier this year. But banks, it seems, are not on-board with the Reserve Bank of India’s efforts.

Most banks in India haven’t fully passed on the benefits of lower repo rates to borrowers.

In fact, they haven’t even given their customers the full benefit of the repo rate cuts that happened before the Covid-19 outbreak in March.

Between February 2019 and May 2020, the cost at which banks borrow from the RBI fell by 225 basis points. But in the same period, the weighted average lending rate, which is the interest paid by individuals and businesses on bank loans, has dropped by 151 bps on the fresh loans and just 37 bps on existing loans.

Mortgage borrowers – predominantly mid-income and facing the heat of an economic slump – are still paying relatively higher interest costs.

Tushar Borhade, an IT professional, who has taken a home loan from India’s largest lender State Bank of India, said his interest rates have dropped only marginally over the last year. “Every time the RBI cuts rate, the bank only passes on the benefit by five to 10 bps points,” said Rishikesh Kulkarni, an IT professional who had taken a loan from IDBI Bank a year ago.

The central bank is cognisant of the situation. In fact, frustrated by poor transmission, the RBI had directed banks in October last year to link retail loans to external benchmarks, including repo rate.

This may have improved the transmission of rate cuts, according to the RBI. But there are still other variables, which make it difficult for banks to pass on the benefits completely.

Old commitments and woes

Since banks use the money in deposits to dole out loans, analysts said, one of the major reasons for the lag in the transmission is the fixed rates of some of the deposits.

Around 55% of the deposits in India are for a fixed term of two to three years, noted Abhinesh Vijayaraj, vice-president of equity research and banking analyst at Chennai-based advisor Spark Capital. “So banks cannot cut rates for these deposits immediately. Only after they mature, banks can reduce rates when customers come to them for rolling over these deposits,” said Vijayaraj.

He also pointed out that banks compete for deposits, which helps them to lend more and hence they can’t drastically cut interest rates on loans despite repo rate reduction.

This is evident from RBI data which shows that term deposit rates haven’t fallen sharply since February 2019.

Apart from the cost of deposits and repo rate, banks charge a risk premium, which is based on the profile of a borrower. With the economic slump hurting individuals’ incomes, banks have increased the risk premium.

“In today’s scenario, banks are opting for conservative approach in retail lending especially for the self-employed segments and some private-sector employees as the uncertainty looms over pay cuts and job losses,” said Anil Gupta, a banking analyst at credit rating agency ICRA.

In addition, banks add spread to the loan interest rate, which involves operating cost, credit cost, and profit margin. Bad loans are expected to mount due to the grim economic environment, and hence banks will be looking to charge higher interest rates to offset their losses. These factors are further pushing interest rates upwards.

Worst off

While banks have marginally cut interest rates, non-banking financial companies are in no position to provide relief to their customers. Post the IL&FS crisis, the cost of borrowing for most of India’s shadow bankers has gone up.

“Since last year they have been marginally cutting rate and hence I had to pay a fee of Rs 6,000 to avail full benefit of recent rate cuts by the RBI,” claimed Abhishek Kumar, IT professional, who has taken a home loan from HDFC.

Vijayaraj of Spark Capital said NBFCs heavily rely on banks and debt markets. “Banks have been reluctant to give money to shadow bankers in the current economic environment. Also, debt markets have become risk-averse. As their cost of borrowing goes up, they won’t be able to lower interest rates.”

It’s clear that the mid-income mortgage borrowers are stuck between the devil and the deep sea. And with a grim economic scenario unlikely to improve for some time, their financial suffering may remain elevated.

This article first appeared on Quartz.