Topic: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
6. Private banks were the slowest to pass on the benefits of falling interest rates to their customers last year compared to their state-run and foreign rivals. Discuss in detail the underlying causes of for private banks not passing on the benefits of interest rate cuts to its customers compared to other banks. (250 words)
Why this question:
Discuss the issues of private banks not transmitting benefits of interest rates to the customers.
Key demand of the question:
Explain the issue in detail and highlight the impact of the problem while suggesting solutions to the issue.
Discuss – This is an all-encompassing directive – you have to debate on paper by going through the details of the issues concerned by examining each one of them. You have to give reasons for both for and against arguments.
Structure of the answer:
First discuss who small entrepreneurs are.
Discuss that the process of setting interest rates by banks is at the core of transmission and the central bank has for several years been trying to make it more transparent. This has led to the change from benchmark prime lending rate
(BPLR) to base rate to MCLR and finally to external benchmark-based lending rates.
Explain what does the RBI data show?
The median one-year marginal cost of funds-based lending rate (MCLR) for private banks fell a meager 12 basis points (bps) to 9.18% between January and December 2019, compared to RBI’s cumulative 135 bps cut in its key policy rate to 5.15%. Most bank loans are typically priced over the one-year MCLR, making it the most tracked rate.
In the same state-run banks have lowered their one-year median MCLR by 45 bps and foreign banks have cut their lending rates by 75 bps.
Foreign banks have the lowest median one-year MCLR rate at 7.9% as of December. Their public counterparts are at 8.3%. For all scheduled commercial banks taken together, the one-year median rate stands at 8.3%.
Suggest solutions to address the issue.
Conclude with what needs to be done.