Interest Rate Transmission a Must

Wed, 31 Aug Pre-Open

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Reserve Bank of India (RBI) Governor, Dr Rajan, in his foreword to the central bank's annual report for 2015-16 listed that the banks focus on rate cut transmission will be one of the key focuses for RBI.

While RBI has cut interest rates by 1.5% since December 2014, the weighted average lending rate (WALR) has just fallen by 0.65%. Thus, banks have not passed on the lower rates to the customers.

The prime reason behind the same is the huge amount of bad loans on the banks books. Unless a situational improvement is seen on this front there won't be a significant improvement in the transmission situation, especially among the public sector banks.

Despite the recent efforts of the RBI to clean the books of the public sector banks, the bad loan situation at these banks won't improve unless there is a situational improvement on the following counts:

EY Fraud Investigation & Dispute Services found that 87% of the respondents that included bankers stated that diversion of funds to unrelated business through fraudulent means is one of the root causes for the NPA crisis. 

Also, 64% of respondents believed that these bad loans resulted primarily because of lapses in the due-diligence carried out by banks before the loans were sanctioned.

As the report points out: "Third party agencies such as surveyors, engineers, financial analysts, and other verification agencies, etc play a critical role in assuring financial information, proposals, work completion status, application of funds, etc. Lenders rely significantly on the inputs issued by such third parties." The trouble is that the system can and is being manipulated. "Reports are made as a routine, with little scrutiny. In some situations, the reports may be drafted under the influence of unscrupulous borrowers". Further, pressure on public sector banks from politicians to fund the corporates with which they have good connections also leads to such type of situations.

Unless such situations are tackled with, public sector banks will continue to face problems pertaining to bad loans which in-turn will impose problems pertaining to transmission of lower interest rate by the banks to the customers.

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