Following an unconventional cut of 35 basis points (bps) in the policy repo rate by the Reserve Bank of India (RBI) wasted no time in reducing the benchmark lending rate by 15 bps. This is likely to have a domino effect and prompt banks to pare their rates.
Already, the State Bank of India (SBI) reduced its marginal cost of funds-based lending rate (MCLR) from 8.4 per cent to 8.25 per cent, effective August 10, following the monetary policy committee’s (MPC’s) decision to take the policy rate to a nine-year low.
“We expect higher transmission of monetary policy actions and stance by the banks in the weeks and months ahead,” RBI Governor Shaktikanta Das said in his statement.
Sunil Mehta, chairman of the Indian Banks’ Association and MD and CEO of Punjab National Bank, said, “With improvement in liquidity position and reduction in deposit rates offered by banks, further reduction in lending rate are expected.”
Apart from the obvious growth concerns in near term, this repo rate cut gains importance at the backdrop of poor pass-through of policy rate to bank lending rates.
In the first six months of 2019, when the MPC cut repo rate by a cumulative 75 bps, the weighted average lending rate (WALR) on fresh loans saw a drop of only 29 bps, only a “marginal improvement”, the MPC said.
This is a mere 38-per cent pass-through, representing poor monetary transmission. One bps is a hundredth of a percentage point.
This pass-through is slightly slower than before, as a 50 bps policy rate cut had translated into 21 bps reduction in WALR by April, showing a 42 per cent transmission.
Faster reduction in lending rates would also help alleviate top line pressure being felt by India Inc. since last few quarters. Most big corporates registered contraction in top line in the first quarter of the financial year.
While there has been at least some movement in reducing fresh loans interest rates, existing loans have showed their back to successive repo rate cuts. Having said that, private banks have cut their lending rates faster. For instance, in the period of 75 bps repo rate cut (February-June 2019), private banks reduced lending rates on fresh loans by 37 bps, as against a 22 bps slice by public sector banks.
The WALR on outstanding loans, however, increased by 5 bps in that period, nearly equally for private banks and PSBs.
Bankers and industry observers alluded to the underlying issues in financial markets, liquidity problem not yet attaining closure, and the inherent lag in monetary transmission as reasons for adamant lending rates.
“The risk perception is high for all pockets — consumers, investors and lenders. And this keeps the upward pressure on spread despite a reduction in the base rate,” Rajni Thakur, economist at RBL Bank, said.
She underlined that the corporate cycle has not been doing well in recent quarters, and there are some sector specific regulatory issues as well. “Further, bad credit episodes have stretched for way too long to hit the sentiments,” she added.
Despite the hope on reduction in lending rates in the coming months, experts also think that it might not be enough to propel growth. “Although the transmission of past policy rate cut is slowly translating into lower deposit and lending rates of banks, we believe rate cut alone will not be able to revive the falling consumption and investment demand in the economy. Much more is required,” Sunil Kumar Sinha, principal economist at India Ratings, said.