Banks To Pass On Benefits Of Reduced Rates To Borrowers: Finance Minister
Finance minister Nirmala Sitharaman, on August 5, 2019, met the heads of public sector banks (PSBs), as well as private lenders including HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra and CitiBank, who agreed to take steps to review their lending rates, as they have not transmitted to borrowers, the benefits of reductions in the policy rate by the Reserve Bank of India (RBI). Since December 2018, the monetary policy has been eased substantially by the RBI, with policy rates being cut by 75 basis points (bps) and the policy outlook being changed to 'accommodative'.
The RBI governor Shaktikanta Das had said, on February 18, 2019 that he would meet the heads of public and private sector banks, to discuss transmission of interest rate cuts to borrowers. "Transmission of rates is very important, especially after the central bank announces a rate cut. It's already stated in our post-monetary policy committee (MPC) conference. I am having an interaction with chief executive officers and managing directors of banks, both public and private sector, on February 21," Das had said.
Repo rate is the rate at which the central bank lends money to scheduled financial institutions. Since the cost of borrowing money goes down for banks, they are expected to pass on the benefits to other borrowers. However, a public-interest litigation (PIL) filed in the Supreme Court (SC), in 2018, claimed that banks quickly raise the lending rates as soon as the RBI hikes repo rate. The same banks, however, drag their feet, if the RBI reduces repo rate, said the petition, denying the borrowers the benefits.
“There is minimal or often no reduction in interest rates of old borrowers. Effectively, the banks are changing the rate for one set of customers and not the others,” the PIL filed with the SC in October 2018 read. “This is gross discrimination in as much as it is in the teeth of equal protection of law enshrined under Article 14 (right to equality) of the Constitution. This unfair and discriminatory, as has been remarked by the RBI's own study group,” it read further.