Mumbai, Apr 5 (PTI) The surge in deposits after the note-ban has helped banks cut interest rates, but the high quantum of dud assets is a drag, which hurts monetary policy the transmission into lending rate cuts for borrowers, the Reserve Bank said today.

It can be recalled that RBI has long been complaining against lenders for poor transmission of policy measures since it switched to cutting rates in January 2015.

“The surge in low cost current account and savings account deposits into the banking system post demonetisation, coupled with the aggressive reduction in term deposit rates, aided the pass through of policy rate cuts to lending rates,” it said in the Monetary Policy Report, released with the first bimonthly monetary policy report.

It said even though the lending rate cut in the system averages at 80 bps as against 200 bps done by RBI since the rate cut cycle began, the data post November 2016 note-ban makes it optimistic.

As against the 0.17 per cent reduction in the one-year marginal cost of funds based lending rate in the January 2015 -November 2016 period, the same has seen a cut of 0.88 per cent post the note ban, it said.

However, on the flip side, the central bank’s half yearly report said the NPAs, which have touched double digits, are the spoiler.

“Deterioration in asset quality impacted monetary transmission in India,” the report said, citing a study based on data of over eight years.

“The asset quality of banks plays a significant role in keeping the spread over the MCLR or base rate low. With deterioration in asset quality, banks tend to charge higher spreads by loading higher credit risk premia while pricing loans, thereby impeding monetary transmission,” it added.

The banking system is currently reeling under a huge pile of over Rs 11 trillion in NPAs, which is widely expected to go higher once a new set of rules governing NPA recognition and ending all the special dispensations come into effect from April 1.

This is published unedited from the PTI feed.