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    Private bank rates higher due to inflated margins: RBI

    Synopsis

    An RBI analysis of different retail rates shows that the average margins over the benchmark repo rate for private sector bank could be higher by as much as 260 basis points compared to their public sector peers. One basis points is 0.01 percentage point.

    RBIAgencies
    Spreads on personal loans and credit cards was as much as 354 basis points compared to 69 basis points for housing loans.
    Mumbai: Private sector bank lending rates continue to be more expensive to small borrowers compared to public sector banks mainly due to the higher margins they charge on these loans to boost profits, Reserve Bank of India (RBI) said in its monetary policy report for fiscal 2021.

    An RBI analysis of different retail rates shows that the average margins over the benchmark repo rate for private sector bank could be higher by as much as 260 basis points compared to their public sector peers. One basis points is 0.01 percentage point.

    The difference in the margin is the least for personal loans at just 40 basis points though private sector banks on an average charge a higher margin compared to public sector banks.

    "The median spread in respect of fresh rupee loans linked to the policy repo rate (i.e., median weighted average lending rate (WALR) over the repo rate) was the highest for ‘other personal loans’. Among the bank-groups, the median spread charged by public sector banks for different categories of loans was lower than that charged by private sector banks," RBI said.

    The difference between the average margins charged by public sector banks and private sector ones anges from 260 basis points on education loans, 200 basis points on home loans, 160 basis points on vehicle loans, 60 basis points on micro and small enterprises and 40 basis points on personal loans.

    Private sector bank margins are higher even on loans calculated by the marginal cost of funds based lending rate (MCLR) mainly because of the higher concentration of retail loans in ther portfolio, RBI said.

    "The median spread [WALR on fresh rupee loans over 1-year median marginal cost of funds-based lending rate (MCLR)] charged by private sector banks was higher than that of public sector banks, reflecting, inter alia, differences in the lending portfolio. Sector-specific WALRs in respect of sectors such as micro, small and medium enterprises (MSMEs), credit card and other personal loans were higher than the overall WALR for both public and private sector banks. The share of loans to each of these sectors in total loans sanctioned by private sector banks was higher than that of public sector banks," RBI said.

    Since October 1 banks have to mandatorily link their new loans to individuals and SMEs to an external benchmark like the repo rate or treasury bill rates. However, a majority of the loans continue to be linked to the MCLR, though customers have the option to move to an external benchmark linked loan.

    Spreads on personal loans and credit cards was as much as 354 basis points compared to 69 basis points for housing loans.

    "Spreads, i.e., WALR on outstanding rupee loans over 1-year MCLR charged by scheduled commercial banks, were lowest in respect of housing loans, reflecting lower probability of default and availability of collateral, as also competition from NBFCs. Personal loans – other than housing, vehicles and education – are mostly unsecured and involve higher credit risk; hence, the spread charged was the highest for ‘other personal loans’," RBI said.


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