Although RBI has been continuously slashing interest rates, banks have not been passing on the rate cut in the same ratio. The lenders have reduced the deposit rates by almost the same proportion of policy rate cut but only a partial cut is noticed in the lending rates.

Since mid-October RBI has cut the CRR - mandatory deposit that banks need to keep with RBI - by 400 basis points to 5%. Similarly the repo rate - the rate at which banks borrow from RBI - have also been lowered down to by 400 basis points to 5% but yet the lending rates in the economy have only come down by a maximum of 150 basis points. Deposits rates on the other hand are decreased by 250 basis points.

The industry leaders in both public and private space have lowered their lending rates by a small percentage. ICICI Bank has slashed its benchmark prime lending rate (BPLR) by only 50 basis points from 17.25% to 16.75% ever since RBI has made changes in its rates. State Bank of India (SBI) has reduced the PLR by 150 basis points to 12.25% during this period. However others like Union Bank, Bank of Baroda and Bank of India have slashed their PLR down to 12% but this rate is valid from April 1st. At present their PLR stands at 12.5%, decreased by 150 basis points since October.

Punjab National bank is the only lender that has resorted to a cut of 250 basis points in its PLR. Presently the bank's PLR stand at 12.5%.

Recently the banks chiefs were asked by the RBI's Governor about the further cut in their lending rates. Bankers said that they are already giving 75-80% of their loans below the benchmark rate.

Home loans, auto loans, loans to farmers and loans to large top-rated corporates are all being disbursed at interest rates below PLR. SBI has introduced home loan at 8% and auto loan at 10% for one year. Similarly Central Bank of India has also fixed the home loan rate at 8% and Canara Bank has fixed it at 8.25% for the same tenure. All these rates are much below the benchmark rates of the banks.

A banking report by Nomura said: "Besides slowing credit demand, rising credit risk and expectations of an increase in non-performing loans have kept bank lending more restrictive, diluting the credit channel of policy transmission. The level of banks' risk aversion can be gauged by the difference between the prime lending rate (PLR) and the reverse-repo rate (RRR, essentially a risk-free rate at which banks park their surplus funds with RBI. The higher the PLR-RRR gap, the larger the opportunity cost of holding money. In 2003, bank credit growth started picking up when PLR-RRR gap peaked at 6.5%. Currently, this gap is already at a high of 8%, suggesting a large disincentive to hold money. Yet banks remain averse to lending."

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