How RBI can make loans cheaper for us
The Reserve Bank of India's rate cuts do not necessarily inject fresh liquidity into the system. Banks are still left to fend for their own bank deposits and incomes.
Injecting liquidity and supply would do a lot more than policy rate cuts or monetary policy stance to bring down deposit rates. And that is the way to do it. As the bank’s funds come down, so will lending rates and not any other way round.
RBI and banks differ on lending rate cuts all the time, even as the central bank sees more room in softening, but bankers do not agree.
RBI governor Urjit Patel has made a strong case for making loans cheaper for customers. However, bankers say there is little room for easing lending rates. They point to low income growth, on the back of tepid growth and higher costs of credit.
Banks point out that the average lending rate cut in this period cumulatively adds up to 90 bps in the past five months and with this they have done their bit aided, of course, by easier liquidity in the system now due to demonetisation.
Already, interest rates on deposits to even sustain the existing marginal cost of funds-based lending rate (MCLR) looks tough. MCLR is a new benchmark introduced by the RBI to make banks accountable for rate revisions, given that the marginal cost of funds based on the lending rate is favourable.
Further action will depend on how much money from low-cost deposits stays with banks after the current limits on withdrawals are removed.
The future course of MCLR would be purely governed by trends in underlying parameters such as marginal cost of funds and negative carry-and-cost of operations.
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| RBI governor Urjit Patel has made a strong case for making loans cheaper for customers. |
Most public sector banks are under great stress of heavy credit costs and low loan growth and it is already an uphill task for these bankers to preserve the margin and profitability.
A public sector banker says the bank’s net interest margins had taken a beating due to loan interest income, an effect of tepid credit off-take.
Bank loan growth has since decelerated from an annual rate of 11 per cent in January 2016 to 5 per cent in January 2017.
It is to be remembered that a huge pile of non-performing assets and the absence of remonetisation of banks in a big way is standing in the way of reducing interest rates.
The RBI has admitted, however, that the above factors are holding back banks from transmitting the benefit of rate cuts to borrowers. In this background, the repo rate cuts can’t transmit into a miraculous reduction in lending rates.
At best, monetary policy stance can balance inflation and growth dynamics that will provide long-term stability, but can’t help to micro-manage bank rates - is the general feeling most public sector bankers share.