Reserve Bank of India governor Urjit Patel has made a strong case for making loans more cheap for customers. However, bankers say there is limited room for easing of lending rates. They point to low income growth, on the back of tepid growth and higher costs in credit.
Patel said banks have scope to reduce rates further. While the central bank has reduced its key policy rate by 175 basis points, the weighted average lending rate cut in this period is 85-99 basis points.
RBI has admitted to factors that hold back banks from transmitting the cut’s benefits to borrowers. These are a huge pile of non-performing assets and the big need to recapitalise, especially for public sector banks (PSBs).
Another aspect that will improve transmission is if adjustments in small savings rates are made in line with changes in the yield on government securities of corresponding maturity, RBI has said.
State Bank of India (SBI) managing director P K Gupta said it was difficult to reduce lending rates in the near term. Banks will have to reduce interest rates on deposits to even sustain the existing Marginal Cost of Funds- based Lending Rate (MCLR). Further action will depend on how much money from low- cost deposits stays with banks after the current limits on withdrawals are removed, Gupta added.
Seconding this, Bank of Maharashtra managing director R P Marathe said his bank had reduced its MCLR by 20 basis points in February, a cumulative 90 bps cut in the past five months. So, he said, the banks were already doing their bit, aided by easier liquidity in the system. The future course on MCLR would be purely governed by trends in underlying parameters such as the marginal cost of funds, negative carry and cost of operations, he added.
Most PSBs are reeling under heavy credit costs and low loan growth. They and others are worried about protecting of margins and profitability.
In January, SBI, ICICI Bank and other commercial banks had cut their MCLR by up to 80 bps across tenors. They took the benefit of a significant drop in incremental cost of funds due to inflow into low-cost deposits after the demonetisation in November 2016.
From April 1, 2016, banks compute the interest rates on advances by adding the components of spread to the MCLR. The latter works as the internal benchmark for such purposes. So, the rate of interest charged to a borrower varies from bank to bank. It also depends on factors such as cost of funds, operating costs, tenor premium, business strategy premium and credit risk premium.
A public sector banker said banks’ net interest margins had taken a beating due to low interest income, an effect of tepid credit offtake. Bank loan growth had decelerated from an annual rate of 11 per cent in January 2016 to five per cent in January 2017.