RBI to force banks to give cheaper loans

Cuts rates by 25 bps to 7-year low; considers a new benchmark to make banks more responsive to rate cuts
Updated on
2 min read

MUMBAI: Ending months of hand-wringing, Reserve Bank of India Governor Urjit Patel, has finally spoken. Bowing to public pressure, plummeting retail inflation and slowing economy, the central bank cut the benchmark repo rate by 25 bps to 6 per cent, but that’s not the good news.
The RBI believes banks aren’t fully passing on the rate cuts to customers. It is now considering a new market-linked benchmark to make banks’ base rate ‘more responsive.’ Though policy rates are down by nearly 2 per cent since January 2015, banks passed on less than 1 per cent (excluding Wednesday’s 25 bps) to existing customers.

For instance, SBI’s home loan rates fell from 9.85 per cent in April, 2015 to 8.4 per cent now. While new customers get lower rates, the transmission has not been ‘entirely satisfactory,’ for existing borrowers, who continue to be under the 9 per cent slab.
This is unsettling the banking regulator, which floated an internal study group to see if rates can be market-linked. The report is expected by September 24, ahead of the next policy review on October 3-4. “The experience with the MCLR system for improving monetary transmission has not been entirely satisfactory,” said Viral Acharya, Deputy Governor, RBI.

According to Patel, banks have been selective in rate cuts in aggressive segments like home and auto loans and new lending, but other segments, where borrowers are still tied to the base rate, leave much to be desired. “Given the liquidity conditions prevailing and that we have reduced policy rates by a substantial amount since the start of easing cycle, I think there is scope for banks to reduce the lending rate for those segments. So far, they have not benefited to the full extent of our policy rate cuts,” he said.

The RBI’s past policy statements hinted that there was scope to reduce interest rates by another 70-80 bps. With Wednesday’s 0.25 per cent, customers can expect a full 1 per cent rate revision. The central bank’s bi-monthly statement also devoted a meaty paragraph on transmission of rates and if options could be explored to improve monetary transmission linking bank rates directly to market-denominated benchmarks.

This is crucial as effective transmission will ease payments. While a quarter per cent rate cut reduces monthly EMI by roughly Rs 470, one per cent correction results in a significant Rs 1,860 saving. This will not only help retail customers like you and I, but also corporate borrowers.
The downside, however, is for the depositors, who have been bearing the brunt of lower interest rates for over two years now.

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