It might be quite frustrating for you if you were expecting your bank to lower interest rate on your loan for past two months, as most of the banks haven’t. A policy rate cut by RBI is considered as a signal to banks for making credit cheaper. Since the beginning of 2015, RBI has slashed repo rates twice outside monetary policy reviews. However, banks have been reluctant to pass on these cuts to borrowers. PersonalFN shares its views on this trait of banks. Let’s first see what refrains banks from lowering interest rates.
 

 

• Short term liquidity challenge: As a last cycle to pay advance tax is due on March 15th, there is less cash available with banks. This causes a temporary liquidity squeeze and short term borrowing rates go up, making it difficult for banks to keep cost of borrowing lower.
   
• Banks focus on securing income: Credit growth has been low, impacting income and the focus is on securing income ahead of the quarterly earnings. If banks reduce the base rate, the reference point for pricing loans, the hit on revenues will be immediate. Banks are trying to maintain margins.
   
• PSU banks operating on low margins: public sector banks are facing pressure on their bottom lines due to rising non-performing assets and are trying to maintain margins and therefore may not cut rates at least until beginning of the next Financial Year (FY). PSU banks still hold a commanding position in the industry as they collectively contribute nearly 70% in total banking business in India. Their policies largely affect a wide base of borrowers.
   
• Banks tend to be a little faster in raising rather than cutting rates: Banks have usually been found reluctant to pass on the rate cut to borrowers immediately. On the contrary, they are extremely flexible in passing on the rate hikes. This again, is done to maintain margins.
   
• The credit costs have been high: Reliance on bulk deposits and poor quality of assets leading to higher provisioning has made it difficult for banks to keep costs associated with borrowings lower. Poor asset quality has also affected margins negatively.
   

In simple words, banks are not lowering rates because it would straight away hit their margins. However, it is expected that, in the next fiscal banks might begin passing on the rate cuts. Furthermore, RBI has already specified that, it would monitor whether rate cuts have been passed on and would also assess the positive impact of rate cuts on the economy before taking any step towards lowering policy rates further. This makes it clear that banks can’t ask for rate cuts if they don’t pass on benefits to borrowers..

Your finances are affected whenever borrowing cost goes up or down. Usually impact is considerable when loan amount is high as it is in the case of home loans. Therefore, it is imperative for you to thoroughly assess your loan servicing ability before you apply for it. A personalised financial plan takes care of most of the aspects related to personal finance.

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