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Public sector banks cut rates more than private peers: RBI report
The decline in the weighted average lending rates on fresh rupee loans by public sector banks was 31 basis points till May, while that for private banks was 20 basis points. Foreign banks saw a sharper decline of 49 basis points (see table).
For fresh deposits, rates for public sector banks fell 47 basis points compared to a 41-basis-point drop by private banks.
The six-member rate-setting panel cut the policy repo rate by 50 basis points between February and May. In June, the rate was further reduced by another 50 basis points.
'During the current easing cycle (February–May 2025), the decline in weighted average lending rates on both fresh and outstanding rupee loans was higher for public sector banks (PSBs) as compared to private sector banks (PVBs),' the State of the Economy report of the RBI said.
'In response to the 100-bps reduction in the policy repo rate since February 2025, banks have adjusted their repo-linked external benchmark-based lending rates downward by 100 basis points and marginal cost of funds-based lending rates by 10 basis points,' it added.
Consequently, the weighted average lending rates on fresh and outstanding rupee loans of scheduled commercial banks declined by 26 basis points (domestic banks: 24 bps) and 18 basis points (domestic banks: 16 bps), respectively, during February–May 2025.
'System liquidity remained in surplus to facilitate a faster transmission of policy rate cuts to the credit markets,' the report said.
The report also observed that banks have been reducing savings account deposit rates, with some state-run banks now offering historically low rates.
'Banks have also reduced their rates on savings deposits. Currently, the savings deposit rates of some PSBs are prevailing at a historical low, since their de-regulation in 2011,' the report noted.
State Bank of India, the country's largest lender, and HDFC Bank, the second-largest, both offer 2.5 per cent on savings account deposits.
While noting that the rates on small savings schemes were kept unchanged by the government for the second quarter of the current financial year, the report said, 'The prevailing rates on these instruments are higher than the formula-based rates by 33–118 basis points.'
On loan growth, the report said average bank credit growth continued to moderate across key sectors of the economy in May 2025. Credit to non-banking financial companies (NBFCs), on a year-on-year basis, contracted in May 2025 as they raised significant debt from capital markets via private placements.
The report also highlighted a sharp deceleration in retail credit, due to a decline in personal loans, vehicle loans, and credit card outstanding. 'While overall credit to the industrial sector recorded subdued growth due to a decline in credit growth to infrastructure, credit to the MSME sector continued to remain buoyant,' it said.
Commenting on the Indian economy, the report said it remained largely resilient, supported by strong fundamentals, despite global uncertainties. It said lower inflation and favourable farm sector prospects would support aggregate demand.
'Easing inflation, improving kharif season prospects, front-loading of government expenditure, targeted fiscal measures, and congenial financial conditions for faster transmission of rate reductions should support aggregate demand in the economy going forward.'
The report observed that financial markets seem to have taken trade policy uncertainties in their stride, possibly reflecting optimism about reaching trade deals that are less disruptive to the global economy.
'Even so, underpricing of macroeconomic risk by financial markets remains a concern. The average trade tariff rates are set to touch levels unseen since the 1930s,' it said.
The report emphasised the importance of building more resilient trade partnerships, presenting a strategic opportunity for India to deepen integration with global value chains.
'In addition, measures to accelerate domestic investment in infrastructure and structural reforms aimed at improving competitiveness and productivity would build resilience while supporting the growth momentum,' it added.
The report was authored by RBI staff under the guidance of Poonam Gupta, deputy governor, RBI. The views expressed are those of the authors and not of the central bank, it was clarified.
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After her husband's accident, the family's income is now nearly negligible, making it all the more challenging for them to repay the loan. Both men were treated at private hospitals. 'We don't get admission in government hospitals,' she says. The other women nod along. Parvati Devi, 38, says her husband works in Bengaluru, Karnataka, as a daily wage labourer. He left 15 days ago and will return only next year. 'We had to borrow money for our eldest daughter's wedding,' says Parvati, who also belongs to the Musahar community. 'We borrowed nearly ₹1.5 lakh from the local money lender four years ago. Unable to repay the loan, I took three loans from three microfinance institutions.' Her total liability amounted to ₹1.35 lakh and she had to pay monthly installments of about ₹7,000. 'Agents never fail to turn up' Chandra, Punam, and Parvati sought loans for weddings or for treatments in hospitals and struggled to repay the amounts. 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She has six children — three daughters and three sons — and all of them are married. She says she has been left alone to repay the loans she borrowed for their weddings and for other expenses. 'The recovery agent took away everything I had — a table, a chair, my bed, the cooker, the gas cylinder, and even my supply of wheat for the year. He stripped my house empty.' When asked if she reported the incident to the police, she stares blankly. 'How can we?' she murmurs. The women say at least 20-25 families in their village alone have fled fearing recovery agents. As they start counting and naming the families, many of them turn towards Pawan Devi. Pawan took loans from five microfinance institutions for her son's wedding, but she has been unable to repay the amount. Pawan and her family fled the village, spent more than a year in Punjab, and returned only last week. Pawan cannot recall the name of the village where she and her family stayed. 'Barring the biting cold, it was better there,' she says. 'The landlord didn't charge us for electricity or water. There were clean toilets. And we had a regular income working in the fields.' Pawan says what she cherished the most about her stay in Punjab was the absence of recovery agents. But the agents she dreads are now back at her doorstep. 'They come every other day. Sometimes they stand outside for hours. Sometimes they enter the house and start rifling through our papers. The other day, they took away my son's Aadhaar card,' she says. Around 30 kilometres away at Navtol village in Bhawanipur panchayat of Darbhanga district, Mahesh Kumar Roy, who says he is a recovery agent with Muthoot FinCorp, is on his daily rounds of the village. Mahesh, who hails from Darbhanga, goes from house to house on his motorcycle. He pulls out the sheaves of papers rolled up between his motorcycle handles and runs his finger along the names. 'Since 2022, when I joined the company, I have been given 1,100 households to track. At least 450 families who defaulted on their loans have disappeared. I make regular rounds, but all I see is locked homes,' he says. Mahesh adds that people 'disappear only after they have paid 15-16 installments' and 'after we have managed to recover at least 60% of the principal amount.' Mahesh prides himself as a 'decent' agent. Aware of the reputation that recovery agents have, he looks at the crowd gathered around him and asks them whether he is intimidating or threatening. They all say 'no'. Rules on paper The RBI issued exhaustive guidelines in 2022 collating the piecemeal directives it had issued earlier. It said that the lenders must 'provide the flexibility of repayment periodicity on microfinance loans as per borrowers' requirement'. That is, the repayment period of the loan must be moulded to the requirements of the borrowers, rather than the needs of the lender. To ensure that microfinance loans do not unduly burden the borrowers, the RBI directions also include a provision that says each regulated lender must ensure that the monthly repayment burden of a household should not exceed 50% of the monthly income of that household. RBI also has a separate set of guidelines for recovery agents. It defined what would be deemed as harsh methods, such as use of threatening or abusive language, persistently calling the borrower and/or calling the borrower before 9:00 a.m. and after 6:00 p.m., harassing relatives, friends, or co-workers of the borrower, publishing the name of borrowers, the use or threat of use of violence or other similar means to harm the borrower or borrower's family/assets/reputation, or misleading the borrower about the extent of the debt or the consequences of non-repayment. However, the regulations on the interest to be charged on these loans simply say that the interest rates and other charges and fees on microfinance loans 'should not be usurious', and that the RBI would scrutinise this aspect of the loans. Andhra Pradesh, Telangana and Assam have specific regulations for microfinance. Several other States such as Kerala, Gujarat, Tamil Nadu, Karnataka, Maharashtra, and Madhya Pradesh have laws regulating money lenders, which also include microfinance institutions. Assembly elections are scheduled in Bihar in October, but there is no political thrust in the State on bringing in any regulatory mechanism in this regard. Jayati Ghosh, Professor of Economics at the University of Massachusetts Amherst, U.S., says it is not surprising that the RBI guidelines for microfinance institutions are not being implemented since there is often a lack of implementation of State policy. She also says there are fundamental flaws in the microfinancing model. 'While it makes credit accessible for the poor, there is high interest and lack of monitoring of how repayment is ensured, which allows for threats, intimidation, and pressure to take on multiple loans,' she says. 'In many places, linkages with banks through the SBL (SHG-Bank Linkage Scheme) have been provided, but these also provide limited funds. Only in States where these SHGs are effectively co-operatives that create income-generating opportunities (such as Kerala's Kudumbashree) has this been more successful.'
