The Economic Survey tabled today in the Parliament made a comparison of how the public sector bank and private banks passed on the benefit of key policy rate cut by the RBI to existing and new customer base. As per the Survey, private banks came up with greater transmission in case of new loan accounts while PSBs displayed greater transmission on existing loans. Also, private banks they reduced deposit rate more in comparison to PSBs.
This simply implies post the rate cut exercise by the RBI amid the Covid 19 led blow-out, private banks offered reduced rate to new borrowers. In contrast, PSBs transmitted reduced rates to existing borrowers more in comparison to private banks.
Nonetheless, when making a choice between private and PSB banks, rate transmission is not the sole criterion for borrowers. This is as private sector banks score on several other metrics such as they offer better and faster service, they could be even more liberal when evaluating a loan application in comparison to their public sector peers.
As per the Economic Survey, PSBs lowered rates by an average of 69 basis points on outstanding loans between March 2020 and November 2020, while private banks reduced rates by an average of 59 bps. 1 basis point is one-hundredth of a percentage point. In the 10 months to December 2020 from March 2020, the RBI lowered key policy rate by 115 bps. And the same has been reduced by 250 bps from February 2019 to December 2020.
Now, the difference was even more higher if you compare the period from February 2019 to November 2020, when government banks lowered rate by 94 bps for existing loan accounts, while private sector banks made a cut of only 59 bps. As per the survey, one reason for realizing better transmission can also be the roll-out of the external benchmark-based lending rate from October 1, 2019.
On new borrowers, public sector banks lowered rates by an average of 68 bps between March 2020 and November 2020, while private banks lowered it by an average of 134 bps.