Are not Indian banks unfair to customers?

India's banks seem to be manifestly and insensately unfair to customers.  They reveal an anti-consumer bias in their approach to interest rates. One IMF study shows India's banks are faster in effecting a hike in lending rates, but a rise in their deposit rates is not so quick[1]. The IMF research also showed that these banks are slow in effecting consequential changes in their interest rates pursuant to the changes announced by RBI in its policy rates.

In her research paper on 'Monetary Policy in India: Transmission to Bank Interest Rates', IMF Economist Sonali Das has said there is evidence of "asymmetric adjustment to monetary policy: throughout most of the sample period, deposit rates do not adjust upwards in response to monetary tightening, but do adjust downwards to loosening; and the lending rate adjusts more quickly to monetary tightening than to loosening". 

As if to re-emphasise the  IMF study, pursuant to the repo rate cut of the RBI, the two domestic systemically important banks State Bank of India (SBI) and ICICI Bank have reduced their base rate , (the benchmark to which all loan rates are  ratcheted to, by 40 and 35 basis points (bps), respectively. However, the home loan rate for new customers has come down by only 20-25 bps.[2]

Banks act in oligopolistic herd behaviour. They  can afford to keep rates high as customers seem inelastic to rate movements but only sensitive to outlook. So if SBI and ICICI the big banks (TBTF- too big to fail banks) keep on to high rates, all others muster courage to delay the transmission or pass on only a portion of the benefits. Banks in India are passing on their inefficiencies  ( of NPA, of staff expenses, wasteful extravagance) to the customer. Banks are profiteering and protecting the shareholders ( who get better dividends because of lack of pass through) and their own staff members  at the cost of customers.

India needs a Ralph Nader.

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[1] http://profit.ndtv.com/news/banking-finance/article-banks-in-india-slow-in-passing-on-rbi-rate-changes-imf-paper-776372

[2] http://www.business-standard.com/article/finance/banks-to-face-rbi-heat-for-not-passing-on-base-rate-cut-benefit-115100701183_1.htmlRegulators suggest that they license more banks to ensure greater competition.

Source: Business Standard