RBI cuts the rate at which it lends to banks by 0.25 per cent, wants the benefit passed on to customers; home and vehicle loans could get cheaper if banks take the cue to push Diwali buys, but past experience isn’t comforting
CHENNAI/NEW DELHI:The Reserve Bank of India cut the rate at which it lends money to banks by 25 basis points, taking the interest rate down to 6.25 per cent. This is the sixth rate cut by the Central Bank in the last 20 months. The RBI has also nudged the banks to pass on the rate cut to consumers. This would mean cheaper housing and vehicle loans for consumers. But it remains to be seen when and how much of that benefit would actually reach the common man.
The RBI has reduced key interest rate by 175 basis points since January 2015. However, the banks have been reluctant to pass on the entire benefits to consumers. Most of the banks have reduced the lending rates by only about 0.6 per cent - barring the SBI that has slashed rates by 0.95 per cent.
“With MCLR already stabilised, the rate cut will be swiftly passed on to the consumers,” assures Ashwani Kumar, CMD of Dena Bank. The MCLR is a new methodology of setting lending rates by commercial banks to consumers. It was introduced by RBI in April this year as the banks were slow in transferring the rate cut benefits to consumers. However, the MCLR itself is a bane for existing consumers as the lending rates are fixed for a particular tenure - from one month to one year. As a result, even if banks decide to cut rates, it will affect only the new customers. The old ones will have to wait for a certain period. Agreeing that the banks had not passed on the full benefits of rate cuts to consumers in the past, RBI Governor Urjit Patel said “the transmission through bank lending rate has been less than what anyone of us would have liked to see”.
“We are hoping that over the next quarter or two, keeping in mind the government has also reduced the small savings rates, the MCLR itself will now throw up more transmission to consumers,” he added. Between April and September 2016 itself, the RBI had cut the repo rate by 25 bps but the reduction in one year MCLR was only 15 basis points.
“These steps taken by the RBI will give strong impetus to both consumption and investment-led growth for the country,”said Chanda Kochhar, CEO of ICICI Bank. However, she did not elaborate on when the bank will pass the benefits to the consumer.
What is a repo rate cut?
A repo rate (re-purchase rate) is the rate of interest at which the RBI lends money to commercial banks in case they’re out of money. The RBI has slashed it by 0.25% on Monday, taking the repo rate to its lowest in 6 years (6.25%).
Why should I care?
The RBI lends money to banks. The banks, in turn, lend it to you in the form of loans. Logically a cut in repo rate should mean the rate at which we borrow from banks should come down too
Why haven’t banks passed on all the benefits?
Banks have dragged their feet on passing on more benefit from rate cuts primarily due to unhealthy balance sheets. Banks have been haemorraging money due to a huge percentage of bad loans on the books. From January 2015, RBI had cut rates by 175 bps, including Tuesday’s. But banks passed on around 60 to 95 basis points.
Will transmission speed up now?
The advent of the Marginal Cost of Funds based Lending Rate (MCLR), lets banks calculate interest rates based on interest costs, profitability, cash reserve ratio, Operating costs and tenure premium (longer the loan term, higher the interest/premium). Since this is a more spread out system, it is expected that banks will pass on more benefits to borrowers.
The improving liquidity situation and RBI’s pro-liquidity policies should also spur banks to ease up on lending rates