It’s definitely celebration time for borrowers as loans are set to get cheaper with the Reserve Bank of India mandating banks to ensure that all new loans to retail, micro and small enterprises are linked to an external benchmark .
But banks, which have been slow to transmit rate cuts by RBI said that the directive will impact their margins.
“There will always be some benchmark be it the BPLR, base rate or MCLR. But transmission also depends on the demand deposit rates. As long as the growth in deposits is not enough, then banks have to compete for that. If deposit rate does not come down, how do we bring down lending rates. That’s the challenge and it will continue. But RBI also has to ensure that transmission has to happen but banks have to see how they can transmit not only the lending rate but also the deposit rate,” said a private sector banker, who did not wish to be named on the issue.
Another banker pointed out that cutting lending rates is often not possible when there was a deficit liquidity situation, as was the case earlier in the year. “Also globally, there are signs of further rate cuts, be it the US Fed or other banks. If India also follows that trend, how will banks bring down lending rates further,” he said.
The country’s largest lender State Bank of India was the first bank in July to launch repo linked lending rate home loans in July. Since then, nudged by the Finance Ministry and the RBI , a number of public sector lenders including Bank of Baroda and Syndicate Bank have also launched similar products. Allahabad Bank and Punjab National Bank also announced plans to launch repo rate linked loans.
Till now, private sector banks have remained silent on the issue, with many saying that they were watching the market before they decided how to proceed. Many lenders are already offering repo linked savings rate.
VG Kannan, Chief Executive of the Indian Banks’ Association, said customers will benefit from the move. “(But) for bankers, the net interest margins will get impacted and may shrink as there will be no link to the cost of funds,” he said.
Banks are also likely to look at further lowering deposit rates, according to industry watchers, who also cautioned that once policy rates start to harden, banks will also begin increasing lending rates.
Bank credit over the year
According to RBI data, bank credit between April and June this year grew by 11.7 per cent as against a growth of 11.1 per cent in the same period last fiscal. This was however, much lower than the 13.1 per cent growth in bank credit in the fourth quarter of last fiscal. Aggregate deposits however, registered the highest growth since the quarter ended June 2017 and grew 10.1 per cent in the quarter ended June 30, 2019 as against 7 per cent a year ago.
The RBI has been increasingly concerned by the slow transmission of rate cuts. Despite four cuts in key policy rates totalling 110 basis points, banks have been slow to follow suit. The repo rate now stands at 5.4 per cent but loans to borrowers have not reflected this.