Rate-Hike Transmission Delayed As External Benchmark-Linked Loans Share Remains Low: RBI
The rates on deposit side resets much faster, While on the lending side, it takes time because the proportion of loans that are benchmarked to EBLR is less than 50%, said Deputy Governor Swaminathan.
The lower proportion of bank loans set to the external benchmark-linked lending rate is one of the reasons for incomplete transmission of rate hikes, according to RBI Deputy Governor Swaminathan J.
The Reserve Bank of India has once again emphasised the need for better transmission of the 250 basis points of cumulative rate hikes between May 2022 and February 2023.
"The rates on deposit side reset much faster," Swaminathan said at a post-policy media event in Mumbai. "On the lending side, it takes time to pass on because (the) proportion of loans that are benchmarked to EBLR is still less than 50%."
Loans linked to the marginal cost of lending rate account for a larger portion of state-owned banks' floating rate book than EBLR loans.
Immediate transmission of interest rate hikes is only evident in the EBLR-linked loans, according to Swaminathan. This is one of the reasons why the monetary policy committee kept the stance unchanged at 'withdrawal of accommodation'.
The incomplete transmission of policy rates was also a function of adjustment in the banks' net interest margin to maintain market share, the deputy governor said.
"In the hiking cycle, banks who are in anxiety to maintain their market share in incremental credit also adjust their margin, which also impedes complete transmission in terms of effective interest rates," Swaminathan said.
The weighted average lending rate on fresh rupee loans rose 181 basis points during the tightening cycle. On outstanding loans, the weighted average lending rate rose 113 basis point during this period, according to the RBI data.
The domestic term deposit rates on fresh deposits and outstanding deposits increased 246 basis point and 180 basis point, respectively, the data showed.
