Centre plays blink-blink as unsuspecting common man\, businesses plug holes in crippled banks worth Rs 1.28 lakh crore a year

Centre plays blink-blink as unsuspecting common man, businesses plug holes in crippled banks worth Rs 1.28 lakh crore a year

This amount is nearly twice the Rs 70,000 crore Centre will spend from its own balance sheet in fiscal 20-21 to fund PSU banks

Centre has allowed banks to pocket nearly 1.4 per cent of repo cut by the RBI since 2014, but not passed on to the consumer.

Cash-strapped Centre has found a novel way to fund gaping holes in struggling and crippled government-owned banks' balance sheets with borrowers' hard earned money, without spending a penny on its own. It has allowed banks - both public and private - to pocket nearly 1.4 per cent of repo cut by the Reserve Bank of India since 2014, but not passed on to the consumer - either corporate or retail. High interest rates are considered one of the major reasons for the deceleration and slowdown in the economy.

At banking sector's current loans outstanding of Rs 92 lakh crore, non-transmission of 1.4 per cent interest amounts to a whopping benefit of Rs 1.28 lakh crore that banks are retaining every year. Every year...for perpetuity, until rates are transmitted retrospectively. Most of the money is going towards funding the non-performing assets on banks' balance sheets which touched a high of over Rs 9.49 lakh crore as of March, 2019.

Importantly, this amount is nearly twice the Rs 70,000 crore Centre will spend from its own balance sheet in fiscal 20-21 to fund PSU banks.

The more the loans grow, the more PSB balance sheets benefit. With loans growing at 7.3 per cent in H1 2019, banks - private and public - continue to enjoy the cushion for now. Banks have argued against full transmission saying tenors vary from customer to customer. Especially, since customers' fixed deposits with them may be earning higher rates than lending rates at times.

While banking regulator Reserve Bank of India has cut repo rates (rates at which RBI lends to banks) by 2.6 per cent since it began slashing rates in January, 2014, both public and private sector banks have only passed on 1.2 per cent to the consumer.

This quasi funding to both public and private sector banks comes at the expense of unsuspecting retail and corporate borrowers who have been bearing the brunt of it since 2014 when RBI began cutting repo rate but banks did not pass on the benefit fully. Public sector banks which account for nearly 66 per cent of India's banking industry by assets, are the biggest beneficiaries of this indirect funding of their coffers, though private sector banks will gain too.

Banks in India take cues on interest rates from the country's largest bank-the government-owned State Bank of India. SBI's lending rate has barely moved down 1.2 per cent since RBI began slashing repo rates. As a result, other public and private banks have not cut interest rates.

For long, Centre has continued to play blink blink on the issue of full transmission, often issuing empty threats to the banks to fall in line. It's evident now, that they never meant to.

Especially, after finance minister Nirmala Sitharaman made clear that repo rate transmission will be linked to MCLR from here on-not retrospectively since RBI began cutting repo rates in January, 2014.

As a result, banks have been allowed an additional fat spread of 1.4 per cent annually for life - or at least until the full transmission is forced upon them. This is over and above the 2 to 3 per cent spread the banks already enjoyed between their borrowing and lending.