Reserve Bank of India Governor Shaktikanta Das on Monday said the time had come to formalise the linking of lending rates on new loans to external benchmarks like the repo rate. “We are constantly engaged with banks with regard to faster and greater transmission of the monetary policy rates. Many banks like SBI (State Bank of India) and some others have already linked new loans to the external benchmark (repo rate). I expect the process to become faster,” Das said in his keynote address at the annual banking conference organised by Federation of Indian Chambers of Commerce and Industry and Indian Banks’ Association.
He reiterated his stance that banks needed to cut rates and said the cumulative rate cuts of about 35 basis points in response to the RBI’s 75 basis points cut was not enough. “Today, the economy requires a certain amount of push, not just from the monetary policy but also from its transmission. I think the time has come to formalise this linking of the lending rates on new loans to external benchmarks like the repo rate. We are monitoring the developments in this regard and whatever steps are required in the coming weeks, the RBI will be initiating,” Das said.
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The RBI was to push banks to link their lending rates to an external benchmark from April, but it paused due to opposition from banks who said their margins would be squeezed as deposits don’t get repriced as quickly as lending rates.
Despite that, within two days of the RBI cutting the repo rate by 35 basis points on August 7, a number of public sector banks pared down their lending rates and said at least the retail loans would be linked to repo. That would mean that whenever there is a rate cut, or hike, the linked loans would respond accordingly. Starting September, the details of the loans will start emerging. SBI Chairman Rajnish Kumar also said on Sunday the lender would soon give its home loan customers freedom to migrate to a repo-linked loan. Once the RBI makes it mandatory for banks to link their rates to the policy rate, the transmission will happen almost instantaneously. Of course, it would come at a cost of banks’ profitability. And, it is important that deposit rates fall at the same time as lending rates. The answer could be in floating rates. “Floating rate works both ways. So, if interest rates go up, there is a need to make sure the transmission on both sides is balanced,” said Kumar. Responding to the RBI governor’s call for rate cuts, Kumar said that linking rates to repo “is the most workable”, but transmission should happen on both sides.
“We cannot reprice existing liabilities but once I have available funds at variable rate, the assets and liability will match. We look to link more products to repo but it depends on liability behaviour. We can’t reduce rates so much that we become uncompetitive. It’s a delicate balancing act,” Kumar said. But the governor wants banks to move fast. “We have kept the external benchmark (guidelines) in abeyance because we wanted to see how the market evolves. It is a positive trend that the banks have responded but this process needs to be faster,” Das said. The governor’s speech did not have any mention of the formalisation of repo-linked lending. Rather, it talked about how the RBI is striving to maintain financial stability. Das had a critique on private corporate houses, and the media. “When I read newspapers or watch business television, the mood is not sufficiently positive and optimistic. The mood today ranges from existential angst to a positive attitude. I think the sentiment is very important,” Das said.