The problem with banks passing on the Reserve Bank of India’s rate cuts is that their cost of funds remains high. It’s not just the baggage they’re carrying of deposits paying more than 10% a year a few months ago. Even current deposit rates continue to be high.
For instance, State Bank of India has recently revised its deposit rates downward and its term deposit rates between one and three years ranges between 8.1% and 8.5%.
That is higher than the deposit rate in 2005-06, when, according to RBI’s data, the interest paid on bank deposits of between one to three years ranged from 6% to 6.5%. And, it’s much higher than the rock bottom rates reached in 2003-04, when rates for deposits between one and three years ranged from 4% to 5.25%.
But why were interest rates on bank deposits so low at the time? It wasn’t because the rates on small savings were lower. In fact, post office savings deposits and RBI bonds paid more than bank deposits in 2003-04, which is why the share of small savings in household savings rose during the period.
But there’s a crucial difference between now and then for banks. As on 13 February, the credit-deposit ratio for commercial banks is 71.8%. On 20 February 2004, however, the credit-deposit ratio was 55.18.
Clearly, the banks had a surfeit of deposits at the time. Of course, if loan growth continues to be sluggish, banks will no longer need to chase deposits and be able to cut deposit rates. The credit-deposit ratio has already come down from 74.92 on 7 November to the current level. If history is any guide, it will go down much further.
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