RBI policy: lending rates can come down in auto, personal loans

BL Research Bureau

The RBI holding the repo rate for the second consecutive time, since its cut in October last year, came as no surprise. With inflation on the rise, the central bank had little leeway to tinker with its policy rate.

That said, the RBI has, through a series of liquidity and regulatory tweaks, opened up the possibility of fall in lending rates in certain segments such as auto, home and MSME loans. The RBI also implementing long term repo of one- and three-year tenors, it makes long term funding available to banks at much cheaper rates (as against 6.5 per cent plus currently), will lower cost of funds and trigger a further cut in lending rates. Incremental retail loans for automobiles, residential housing and loans to MSMEs deducted from banks’ net demand and time liabilities (NDTL) for maintenance of cash reserve ratio (CRR), should also result in lower lending rates in these segments.

Better transmission

The RBI had lowered its policy repo rate---the rate at which banks borrow short-term funds from RBI-- by 135 bps in 2019. But the weighted average lending rates on new loans (until December) have fallen by 70 bps on an average across banks. For old borrowers (pre-MCLR regime or pre-repo-linked loans), lending rates appear to have hardly moved. Since January last year, weighted average lending rates on outstanding loans have fallen by just 13 bps.

In a bid to improve transmission, the RBI mandated banks to link their loan rates to the external benchmark (most banks have adopted repo rate) from October 1. This was to ensure that every time the RBI cuts its repo rate, lending rates move lower. But the transmission was still weak until recently.

This was due to multiple reasons.

One key reason has been that until October, when banks had introduced repo-linked loans, the RBI had already cut its repo rate by 110 bps. Hence borrowers had already lost out on the chunk of the rate cut. Two, under the external benchmark structure the RBI mandated that loans are reset at least once in three months-- provided there are changes in the underlying benchmark repo rate. Hence banks have not been in a hurry to reset their lending rates. For instance, in the case of SBI, the bank introduced a benchmark called EBR (external benchmark rate), in October, which is the repo rate plus 2.65 per cent. Despite repo rate falling to 5.15 per cent, after the October 4 cut (from 5.4 per cent earlier), SBI had continued to benchmark its loans against EBR of 8.05 per cent (repo rate of 5.4 per cent plus 2.65 per cent) until December. It is only from January this year that SBI has lowered its EBR to reflect the October cut in repo rate. Currently, SBI’s home loans are benchmarked against EBR of 7.8 per cent (5.15 per cent plus 2.65 per cent). Hence while the transmission under repo-linked structure is faster than under the MCLR regime, it is still not instant.

That said, given that many banks have revised their external benchmark to reflect the current repo rate of 5.15 per cent, a transmission has improved in the past month. Until November, lending rates on new loans had fallen by 50 bps since last January. As of December, the decline in lending rates was a sharper 70 bps (from January).

While a better transmission is good news for borrowers, the RBI is expected to hold rates for a long while. This can limit sharp cuts in lending rates hereon.

But relief in pockets

But the RBI incentivising credit to specific segments such as automobiles, residential housing and MSMEs, in the form of relaxation on CRR (to the extent of incremental loans), can lead to notable falling lending rates in some of these segments, in many banks. Conducting long term repos of Rs 1 lakh crore will also aid in lowering banks’ cost of funds and in turn lending rates.

Until now, only new floating rate personal or retail loans and loans to micro and small enterprises (MSEs) extended by banks were linked to external benchmarks. The RBI has now mandated to link loans to medium enterprises also to external benchmarks from April 1. This should bring down lending rates in such loans too.

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