Small savers subsidize bad decisions taken by banks

Savings passed on by banks

The RBI governor, Dr. Urjit Patel, has given big banks their Diwali gift in advance in the form of a 25 bps rate cut. This move greatly benefits the banks but has negligible and in most cases negative benefits for the small savers.

From 15.01.2015 till 04.10.2016 while the bank rate was cut 200 bps from 8.75% to 6.75%, the banks passed less than half and in most cases less than one-third of the savings to their customers. The table illustrates the transmission of the rate cut savings by banks to their customers. None of the banks have passed on even half, with Kotak and ICICI Bank being the worst performers passing less than one-third the savings.

The common refrain among banks is that their NPA woes don't allow them to pass the savings. But doesn't that amount to small savers subsidizing the bad decisions taken by banks and corporate houses overs the years?

While on the asset side the banks display much reluctance and hesitation to cut rates, they display no such reluctance on the liability side. Banks are able to match up the rate cuts by slashing fixed deposit and term rates for the small savers.

One of the finance companies, Shriram Transport Finance, has enthusiastically applauded the Governor's decision and promptly slashed its fixed deposit rates by 25 bps even though there is no change in its risk profile and financial fundamentals.

It is a sort of double whammy for the small savers in the form of reduced deposit rates and not much benefit on their home or auto loans. This was even admitted by the Governor, but aside from solace he has not much to offer to the small savers.