The Reserve Bank of India (RBI) early March surprised everyone by reduced the policy rate by 25 basis points (bps) to bring down the repo rate to 7.5%. This follows another surprise move in early January this year when it cut the reverse repo rate or the rate at which the central bank drains excess liquidity from the banking system by 25 basis points to 6.75 per cent.Analyst and experts were of the view that this rate cut from the Central Bank will lead to a softening in the interest rates banks charges its customer. However, barring about three banks out of 45 commercial banks, no one cut rates. Nothing happened. Recently the RBI also expressed its frustrations with the banks borrowing from the central bank at a much lower rate but not passing on the benefits to the customeRsAt the heart of it lies pure economics. If you borrow cheaply and lend at a higher rate, you tend to earn more profit. Banks now have lower rates to adhere to and lending has continued to remain high, which in turn is contrary to what RBI wants. With inflation under control, RBI's wish is now to spur greater growth and for that interest rate from banks have to come down. Banks, however, under financial stress prefer to increase their profits as costs rise and bad debts are reaching almost all time highs.Introduced in 2010 to replace the Benchmark Prime Lending Rate (BPLR), Base Rate was expected to make credit pricing more transparent. The BPLR system, introduced in 2003, could not achieve its desired goals and banks could readily lend below BPLR, thus making it difficult for RBI to execute its monetary policy stance. Base Rate became the minimum rate for all loans where banks are not permitted to resort to any lending below it. In January this year, the Central Bank revised the Base Rate guidelines, bringing in new norms on how to calculate it.Till now banks set their base rate by taking into account the deposit rate, which had the highest interest rate, even though the deposit base may be the lowest there. This meant the cost of deposit was kept low. However, RBI now says, "Where the card rate for deposits of one or more tenor is the basis, the deposits in the chosen tenor/s should have the largest share in the deposit base of the bank." This meant while the banks still had the choose the deposit with the highest interest rate, it also had to choose the largest deposit. This has meant the cost of deposit for the banks have gone up and banks have continued to maintain the Base Rate between 10-10.25%.If the Base Rate does not come down, the interest rates for individuals and corporates would continue to stay high.The bad debts or non-performing assets (NPAs) of banks have been climbing steadily and has almost reached alarming levels. In bad shape are the public sector banks that now see their worst level in NPA at 10-year high. Government data show bad debts for all public sector banks reached 5.64 per cent of their total advances as of December 2014 with State Bank of India (SBI) leading the pack. India's biggest bank, SBI accounts for around a fifth of all the lending in India had a high NPA of 4.9% last quarter. Public sector banks today account for 90% of India's bad loans.Things have gone tougher for banks as RBI has said every restructured loan would now be taken as an NPA. Earlier, banks would liberally restructure and repackage loans when the borrower found it difficult to service; something that RBI says is camouflaging the problem.Things look even worse if one looks at the India Ratings report that found one in four of the 500 largest corporate borrowers may formally be tagged as financially distressed (identified as NPA, CDR or restructured) by the end-FY15.The research firm says the cumulative impact may be an incremental Rs 600 billion- Rs 1,000 billion of restructured assets in the banking system. These 500 corporates had a balance sheet domestic currency debt of Rs 28,760 billion at FYE14.Within the top 500 corporate borrowers, 83 corporates, with outstanding domestic currency debt of Rs 2,431billion at FYE14, have not been publicly tagged as financially distressed. There is a strong chance these may end up being NPA by the end of fiscal. The banking industry is under severe stress and especially the public sector banks are in no position to cut rates. With huge losses staring in their face, leaving money on the table is not an option for them. If public banks do not cut rates, there is little competition for private banks follow suit.The important question now is when will the banks lower rates. This will surely not happen in March as banks will wait till the RBI's bi-monthly policy review on April 7. This comes even as the RBI makes sweeping changes in its own operations by introducing a monetary policy committee that would vote on each course of action and reduce the central bank governor's ability to make unanimous decisions. Banks would also like to see which way NPAs go and how the changes in the Base Rate plays out, not to mention the uncertainty behind global oil prices and crop output from the upcoming monsoon season. To hazard a guess, we may have to wait longer to see bank interest rates drop.(Author is cofounder deal4loans.com, which is a platform for online comparison for retail loans in India. Views expressed are personal.)