07/04/2015 3:52 PM IST | Updated 15/07/2016 8:25 AM IST

Banks' Reason For Not Passing On Rate Cuts To Customers Is 'Nonsense', Says Rajan

PUNIT PARANJPE via Getty Images
Reserve Bank of India (RBI) governor Raghuram Rajan attends a news conference after the announcement of the first bi-monthly monetary policy for year 2015-16 at the RBI headquarters in Mumbai on April 7, 2015. India's central bank kept interest rates on hold April 7, saying most commercial lenders have yet to pass on two previous cuts to customers in Asia's third largest economy. AFP PHOTO/PUNIT PARANJPE (Photo credit should read PUNIT PARANJPE/AFP/Getty Images)

Reserve Bank of India governor Raghuram Rajan kept rates unchanged at 7.5 percent in today's policy review and told banks to pass on the previous rate cuts to customers instead of coming up with excuses about high cost of funds.

"Banks are sitting on money," Rajan said. "Their marginal cost of funds has fallen. The notion that it hasn't fallen is nonsense." Rajan had said earlier that he expected banks to act. Today, he sounded impatient with the lack of progress.

This is Rajan's first direct counter to the argument the banks had been making for not cutting rates. State Bank of India and Bank of Baroda are among 43 of 47 lenders yet to lower base lending rates.

Bad loans in Indian banks have ballooned to $67 billion - a worryingly high level. That, along with low profitability and inability to cut deposit rates has prompted banks to stick to current rates and not follow the RBI's lead. As a result, businesses are not getting the funds they need to scale up, and people with hefty loan instalments have got no relief.

But Rajan clearly believes they are exaggerating the cost of funds, and can reduce lending rates. "In my view, banks will start passing on the rate cuts gradually by April onwards," Vaibhav Sanghavi, Managing Director, Ambit Investment Advisors Pvt Ltd., told HuffPost.

The RBI's decision to keep rates unchanged gives banks more time to pass on prior cuts to their customers. It also indicates that the bank prefers to further assess potential inflationary pressures before going for further cuts. The next review meeting is in June.

(With agency inputs)

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