(MENAFN- KNN India) On Tuesday, three top banks (SBI, ICICI Bank and HDFC Bank) finally yielded to the persuasion and lowered rates a tad (15 to 25 basis points). Earlier they were reluctant to bring down the cost of loans, in spite of the two rate cuts by the RBI totalling 0.50%.
Reserve Bank of India Governor Raghuram Rajan has spent most of the past quarter fielding questions on why banks were not transmitting the RBI's rate cuts. On the difference in perception between him and banks on their cost of funds, he wondered if monetary policy had any effect on them. Asked if it was possible to provide any further incentives to bring down rates, Rajan said the market mechanism of competition was the best incentive.
He pointed out that if banks didn't lower their rates, the market would bring them down and the banks would lose business. Banks abroad had to benchmark their lending rates with an external benchmark, unlike what prevailed here, said Rajan.
Indian banks determine the way the base rate is computed, basing it on their costs. The logic of the Banks for not lowering the base rate was that most of funds available with them are term deposits of longer term with fixed interest rates, so rate cut by the RBI does not reduce their costs.
"They have got lot of flexibility there. If they don't exercise this flexibility fully, obviously it has to be pressure from competition that will force them to exercise that," Rajan said. (KNN/DB)
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