Mumbai: In a virtual war of words, RBI Governor Raghuram Rajan Tuesday said it is "nonsense" to assume cost of funds has not fallen for lenders, drawing sharp retort from top bankers with SBI chief Arundhati Bhattacharya saying "in India things work differently from international banks".
Within hours, the state-run lender however announced a small cut of 0.15 percentage point in its base lending rate-- the first by a major bank in many months.
Severely critical of banks not passing interest rate cut to borrowers, Rajan said the liquidity position was strong and there was no reason for banks not to cut lending rates.
"I do not see an environment where credit growth is tepid, banks are sitting on money and their marginal cost of funding (has) fallen, the notion that it hasn't fallen is nonsense, it has fallen," Rajan said.
Rajan, who has announced two rate cuts so far this year without any major bank passing on the same to borrowers, said that sooner the banks cut rate the better it would be for the economy and hoped market dynamics will force lenders to lower rates.
Top bankers were, however, unanimous in rejecting Rajan's suggestions that the situation was ripe for a rate cut and said it takes a lot more than repo rate reductions by the central bank for banks to cut their base rates.
In a sharp reaction Bhattacharya said: "In India things work differently from the international banks. We are very deposit based. If you look at SBI, we have just 1 per cent market borrowing and the rest is basically long term bonds or deposits and deposits are the lion share of it. So, it is based on long term deposits."
Rajan, who earlier served as chief economist at IMF and has been Professor of finance at Chicago University, said: "We are not looking for a specific number (on the bank rate cuts) and saying unless this happens, nothing more will happen. But we want to facilitate the process of transmission."
Bhattacharya said in the absence of social security net in India, the banking system has been working as a proxy for the social security net with people putting their savings in banks and planning their future based on banks' interest rates.
After leaving the CRR unchanged in the policy, Rajan dismissed the very demand for a reduction in the same made by SBI prior to the policy, as "irrelevant". He said there is no co-relation between lower CRR and cheaper loans.
"I don't understand why the market has got so enthused about a cut in the cash reserve ratio. It is irrelevant at this point, as far as the lending rates go," Rajan said
State Bank of India was at the forefront of pressing for a cut in the CRR ahead of the policy announcement, saying it can reduce cost of fund which in turn will help the bank pass on the benefits to borrowers.
ICICI Bank MD and CEO Chanda Kochchar said it not just the repo rate change that determines the base rate change, it depends on cost of funds, deposit mix, liquidity situation and also on credit off take.
"The marginal cost of funds (as an input into base rate) is not a done deal. We have to understand that we are fixed on the liability side, in the sense we take deposits at a particular cost and therefore to re-price the entire asset base on the basis on marginal costing itself has to have a very long transition period and cannot happen tomorrow," Bhattacharya said.
This means when the rates go down, the depositors will start getting much less and when it goes up borrowers will have to pay much more. So, we have to see how we can balance that, she added.
Indian Banks' Association chief T M Bhasin said: "We shared the reasons with the Governor cost of funds were not coming down due to weak pricing of deposits and also the CASA being converted into term deposits at a faster pace by depositors."
So, RBI has now stated that we could look at the possibility of marginal cost of deposits and this also has some concerns, he added.
"This is detrimental to both depositors and borrowers' when the marginal cost of deposits goes up, it is detrimental to borrowers and when it comes down it is detrimental to depositors. So, each has has to work out the statistics and thereafter comment on this," he said.
HDFC Bank's Aditya Puri said base rate cut is a function of the deposit cost.
"If the deposit cost goes down, then there will be a base rate cut. If it doesn't there won't be any base rate cut. However, we feel between now and June, there should be repricing of cost and that will lead to a lower cost of funds for borrowers," he said.
