Heartburn at lenders as loan rates fall but deposit rates don't

Subscribe to enjoy similar stories. India’s state-owned banks have raised concerns with the Reserve Bank of India (RBI) about the weaker transmission of rate cuts to deposits, with lending rates falling significantly faster and straining their balance sheets, according to three people familiar with the discussions. In a meeting with RBI officials about 10 days ago, ahead of the monetary policy outcome on 5 December, multiple state-owned bank chiefs raised concerns that the dominance of external benchmark-linked loans has ensured instant repricing of assets whenever the repo rate moves, said the three people cited earlier.

In contrast, only fresh deposits are repriced, and at a much slower and costlier pace, said the people, who didn’t want to be identified as the discussions were private. This has thinned banks’ net interest margins. “We have passed on 100 bps (basis points) of cuts on the asset side but have been able to reduce deposit rates by only 30 bps, creating a 70-bps spread compression, and this gap cannot be adjusted through ALM (asset-liability management) alone.

Every bank has conveyed this to RBI," said a senior state-owned bank official, one of the three people quoted earlier. So far in 2025, the Monetary Policy Committee has cut the policy repo rate by 100 basis points to 5.5%. A Mint poll of 13 economists showed that nine expect the rate-setting panel to keep the rates steady on Friday, while four expect a 25 bps cut.

The regulator usually meets bankers ahead of the policy meeting. A query emailed to RBI did not elicit a response until press time. Bankers say that RBI’s push to link retail and small business loans to an external benchmark has made lending portfolios highly sensitive to policy moves.