Core Viewpoint - State-owned banks in India are expressing concerns to the Reserve Bank of India (RBI) regarding the ineffective transmission of rate cuts to deposits, leading to a strain on their balance sheets as lending rates decrease more rapidly than deposit rates [1][4]. Group 1: Rate Transmission Issues - State-owned bank chiefs highlighted that external benchmark-linked loans allow for immediate repricing of assets with repo rate changes, while existing deposits are repriced at a slower pace [2][5]. - The disparity in repricing has resulted in a compression of net interest margins, with banks passing on 100 basis points of cuts on the asset side but only managing to reduce deposit rates by 30 basis points, creating a 70-basis point spread compression [4][8]. - Approximately 63% of floating-rate loans are linked to external benchmarks, while existing deposits only adjust when older, higher-cost deposits mature [5][7]. Group 2: Deposit Growth Challenges - Public sector banks have a higher proportion of floating loans linked to the marginal cost of funds-based lending rate (MCLR), while private sector banks have nearly 88% of their floating loans tied to external benchmarks, affecting their sensitivity to policy changes [6]. - Competition for household savings has intensified, with mutual funds now accounting for over one-third of bank deposits, compared to just 12.6% a decade ago, leading to a decline in deposit growth [8]. Group 3: Regulatory and Liquidity Factors - Regulatory factors, such as high runoff assumptions under the liquidity coverage ratio (LCR) framework, are exacerbating the issue by increasing liquidity buffers and funding costs [9][10]. - Economists suggest that RBI could enhance transmission by infusing liquidity into the banking system, which was in surplus of ₹2.58 trillion as of December 1 [11][12]. Group 4: Recommendations for Improvement - To improve deposit growth and transmission, a reduction in small savings interest rates is recommended, as these rates currently exceed bank term deposit rates [14][15]. - Suggestions include exploring floating-rate deposits and market-linked retail liabilities that could adjust in line with benchmark rates, facilitating faster transmission [16].