Banks may not respond to RBI rate cut, if any

RBI had kept the repo rate unchanged at 6.25% in its December policy review

After having effected a sharp cut in marginal cost-based lending rates (MCLR) in January, banks are unlikely to go a further rate reduction even if the Reserve Bank of India brings down the lending rate on February 8.

Banks, mostly public-sector banks, are reeling under heavy credit costs and low loan growth and are worried about protecting margins and profitability. Senior State Bank of India executives said bank might not revise rates in the near term even if RBI reduces the policy rate in its monetary policy review.

RBI had kept the repo rate unchanged at 6.25 per cent in its December policy review.

SBI, ICICI Bank and other commercial banks had slashed MCLR up to 80 basis points across different tenors. They took the benefit of a significant drop in the incremental cost of funds because of the flow of money into low-cost deposits following demonetisation in November. From April 1, 2016, banks compute interest rates on advances by adding the components of spread to MCLR. 

CARE Ratings in a report has said MCLR has been significantly lowered down to 7.98 per cent in January 2017 from 9.05 per cent in April 2016. 

This could be because of excessive liquidity in the banking system due to a surge in deposits after demonetisation.

MCLR works as the benchmark for such purposes. So the rate of interest charged to the borrower varies from bank to bank and also depends on factors such as the cost of funds, operating costs, tenor premium, business strategy premium, and credit risk premium. 

On further cuts in interest rates, Punjab National Bank Managing Director and Chief Executive Usha Ananthasubramanian said the asset-liability committee would take a call based on the asset-liability position and if headroom was available the bank would cut rates.  PNB, a New Delhi-based public sector lender, had reduced the benchmark lending rate last month by 70 basis points.

Another public sector banker said bank net interest margins had taken a hit due to low interest income, an effect of tepid credit offtake. Bank loan growth has decelerated sharply from an annual rate of 11 per cent in January 2016 to five per cent in January 2017. Banks were flooded with liquidity immediately after demonetisation as customers flocked to branches to deposit old currency notes (Rs 500 and Rs 1,000). Deposits of banks in India have grown by about 14 per cent in January 2017, against 10.5 per cent growth in January 2016.