Many Indian banks are unwilling to slash their interest rates on loans or deposits despite reduction in cash reserve ratio (CRR) by 25 basis points. CRR refers to the minimum amount of funds which banks are required to maintain with the central bank. The 25 bps cut in CRR led to the release of Rs. 17500 crore in the banking system.
According to bankers, the 25 bps cut is too small for them to provide the benefits of this reduction to retail borrowers. They say that only a reduction in repo rate will enable them to decrease interest rate on loans to individuals and companies.
One basis point is equal to one hundredth of a percentage point. Repo rate refers to the interest rate at which RBI provides short term money to commercial banks.
On the matter, the Treasurer of Kotak Mahindra Bank Ltd, Mr. Mohan Shenoi said, "The CRR cut has only benefited us by 5-6 bps, and deposit rates have not eased much for us to pass on the benefit to borrowers." He further added, "Deposit rates are still giving customers negative returns in real terms. In this scenario, it is very difficult for banks to cut loan rates."
Mr. P. Mukherjee, the treasurer of Axis Bank also had similar views on the matter, "Liquidity has improved, but this is also the festive season when liquidity tightens due to consumer spending. So, liquidity is better than before but it is not in excess."