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Deterioration in asset quality impacting monetary transmission: RBI

The central bank's half-yearly report said the NPAs have touched double digits

Press Trust of India  |  Mumbai 

RBI, Reserve Bank of India, Monetary policy
People walk past a barricade inside the Reserve Bank of India (RBI) headquarters in Mumbai. (Photo: Reuters)

The surge in deposits after the note-ban has helped cut interest rates, but the high quantum of dud assets is a drag, which hurts the transmission into lending rate cuts for borrowers, the said on Thursday.

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 into the post demonetisation, coupled with the aggressive reduction in term deposit rates, aided the pass-through of to lending rates," it said in the Report, released with the first bi-monthly 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 plays a significant role in keeping the spread over the or base rate low. With deterioration in asset quality, tend to charge higher spreads by loading premia while pricing loans, thereby impeding monetary transmission," it added.

The 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.

First Published: Thu, April 05 2018. 23:31 IST