Banks have started reducing their base rate quickly after the central bank in its policy review meeting yesterday blamed the bankers for not transmitting policy rate cuts in lending rates despite weak credit off take and the front loading of two rate cuts.
'Comfortable liquidity conditions should enable banks to transmit the recent reductions in the policy rate into their lending rates, thereby improving financing conditions for the productive sectors of the economy,' the RBI opined.
Industry has also complained about bank's inability to transmit policy rate cuts in lending rate reduction.
Jyotsna Suri, president, FICCI said, 'Of greater concern to industry is the fact that the transmission of the rate cuts introduced earlier by the RBI has not happened at the level of the banks.
We are however happy to note that the RBI will encourage banks to move in a time bound manner to marginal cost of funds based determination of their base rate as this would improve the efficiency of the monetary policy transmission.'
'Interest rates can be expected to come down as the policy measures already taken reflect in banks'' cost of funding,' Chanda Kochhar, managing director and chief executive officer, ICICI Bank said yesterday.
On Tuesday, State Bank of India and HDFC Bank were first to announce reduction in base rate by 15 basis points each to 9.85% from 10% earlier.
Today, ICICI Bank and Axis Bank have also slashed base rate. ICICI Bank has reduced base rate by 25 basis points to 9.75% as against 10% earlier. Meanwhile, Axis Bank lowered base rate by 20 basis points to 9.95% from 10.15% previously.
Lakshmi Vilas Bank announced reduction in base rate by 15 basis points to 11.10% from 11.25% earlier.
'For monetary transmission to occur, lending rates have to be sensitive to the policy rate. With the introduction of the Base Rate on Jul. 1, 2010 banks could set their actual lending rates on loans and advances with reference to the base rate,' the central bank said.
At present, banks are following different methodologies in computing their Base Rate - on the basis of average cost of funds, marginal cost of funds or blended cost of funds (liabilities). Base rates based on marginal cost of funds should be more sensitive to changes in the policy rates, it opined.
