Page 49 - Banking Finance November 2019

FEATURE

reduce their deposit rates, they will not be able to reduce through by the banking system). The reason for weak
their lending rates. transmission, too, has been largely the same.

Why are banks not reducing their Why doesn’t this happen in developed
deposit rates? countries?
That’s because if a bank were to reduce its deposit rates, That’s because the financial system is far more developed
depositors would shift to a rival bank that pays better interest and diversified, Rakshit explained. Most importantly, the
rates or park more and more of their savings in small saving banking system there doesn’t have to bear the burden of
instruments such as public provident fund, Sukanya Samriddhi providing loans to everyone in the economy – from a small
Yojana etc that pay much higher interest rates. personal loan to buy a refrigerator to large business loan to

There is another aspect. Even if banks wanted to reduce set up a factory. Most demands for big loans are directed
their deposit rates, they can’t always reduce them towards the corporate bond market – wherein a company
immediately. Miren Lodha, Director, CRISIL Research, said floats bonds (or IOUs) and borrows money from the public
65% of total deposits are “term” deposits (fixed for a certain by paying whatever interest rate the market demands.
duration) and take, on an average, up to two years to get
repriced at fresh rates. “Therefore, banks generally go slow Moreover, depositors are not in the habit of getting a fixed
on reducing the interest rates on advances as deposits take interest rate on their savings while expecting a variable
longer to get repriced.” interest rate on their loans. At the current low levels of per
capita income, the savers are far more risk-averse in India
But why are interest rates going up on and unwilling to invest in higher-risk instruments other than
bank deposits. (Source : Indian Exp)
existing loans?
This, too, has to do with the banks trying to manage their Corrigendum
finances. If they are under pressure to reduce the interest Please refer to our Banking Finance, August 2019 issue,
rate they charge on new loans, then one of the things they whereby the Banking Promotional Exam Sample Questions
could do is to push up the interest rates on old loans that - Series 13 has been published along with answers.
allow for such flexibility. It also has to do with the financial Kindly note that the previous series' answers have mistak-
health of a bank; weaker banks would be forced to raise enly been repeated. The correct answers of Series -13 are
rates to cover for past losses, explained Suvodeep Rakshit enclosed bellow.
of Kotak Institutional Equities. Banking Promotional Exam Sample Questions – Ans. 13

What hasn’t linking the lending rate to 1. D. Prompt 15. B. Absorb Liquidity
Corrective Action 16. E. Cheque is written
the repo rate worked? 2. A. SBI by drawer and
Because it is not a viable solution. The banks cannot link their 3. B. Rs. 100 crores dated at some
lending to the repo rate because repo doesn’t determine 4. D. b and c only date in past but
their cost of funds. 5. C. 3.2 Percent not expired
For a repo-linked regime to work, the whole banking system 6. C. R B Barman 17. E. RBL Bank
would have to shift to that – in other words, along with 7. D. 6.7 Percent 18. D. MSF
banks’ lending rates, their deposit rates too must go up and 8. D. Sri Lanka 19. A. National
down with the repo. But if such a regime were in place, 9. C. Hong Kong Payments
depositors would have earned 1.10 percentage points less 10. C. Joint Lender’s Corporation of
interest rate on their savings account. Forum India (NPCI)
11. D. Global Financial 20. D. 60 months
Is this problem of weak transmission Integrity 21. B. 2011-12
new? 12. A. Current assets – 22. C. 560 euros
current liabilities 23. A. A, C and D only
No, it is not. Rakshit of Kotak Institutional Equities said that
at no time in the past has monetary transmission been better 13. B. Systemic Risk 24. C. Dr. Rajiv Kumar
than 50% (that is, only half the rate cuts by RBI were passed 14. A. 48,000 25. D. 1, 2 and 3

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