For most of the existing bank borrowers, the ongoing ultra-low interest rate regime, is like a free lunch not eaten. That’s because, even though the RBI has reduced policy repo rate by 250 bps since February 2019, interest rates on outstanding loans fell barely by 100 bps or thereabouts.
Officials say, the transmission is slow as most of the loans including floating rate loans have a reset periodicity of one year and above, delaying the pass-through.
If the Weighted Average Lending Rates (WALR) for all scheduled commercial banks fell from 10.25% as on March, 2019 to 9.10% as on June, 2021 translating to a reduction of 115 bps, for public sector banks, WALR fell by 113 bps, while for private lenders it was 108 bps.
In August, RBI Governor Shaktikanta Das noted that repo rate cuts have reduced corporate and household debt, but in reality, the room for further lower EMIs exists by a wide margin.
Given that banks took more than two years to reduce rates by about 100 bps on outstanding loans, they may as well take few more quarters to pass on the remaining 115-130 bps repo rate (of the 250 bps) cuts to customers.
The question is whether RBI will maintain its accommodative stance that long.
In contrast, bank deposit rates saw a swift and savage reduction, delivering negative returns to savers. But unlike deposits, which are at fixed rates, over 75% of the outstanding loans are at floating rates, which by design, are expected to facilitate monetary transmission.
However, transmission to lending rates is impeded due to long maturity profile of long tenor deposits.
As much as 76% of floating rate MCLR loans are linked to MCLR of 1 year and above and are reset annually, while just about 16% are linked to MCLR of 3-months tenor.
In October 2019, banks have linked all new floating rate loans to the external benchmark, but such loans amount to a fraction as of today.
Transmission to outstanding rupee loans has often been sticky.
For instance, when RBI raised repo rate by 50 bps during June-August, 2018 and reduced from February, 2019 onwards, the WALR on outstanding rupee loans continued to rise till July 2019, even after six months the easing cycle began.
It means, borrowers who took 10-year floating rate loans benchmarked to the 1-year MCLR with an annual reset periodicity during February-July, 2018, saw their borrowing costs rise (when rates on loans got reset after a year, ie., during February-July, 2019), unlike fresh rupee loans, whose rates fell from March, 2019.
Currently, rates on fresh loans fell by as much as 215 bps and even though borrowing costs have eased, incremental credit growth is in single digits at 5-6%.
The biggest setback is credit to large industries, which decelerated 4.9% during the first half of FY22.
A year before, the decline stood at a 5.1%, indicating that nothing much changed as far as big-ticket loans are concerned.
Credit to large companies is an important marker, as it accounts for 80% of the total credit to industry.
Similarly, within services, NBFCs that account for 34% share in services, and commercial real estate with a share of 9.9% decelerated 6.5% and 3.2% respectively in the first half of FY22.
Sadly, the decline is sharper than seen during the pandemic year, when it fell by 4 and 1.7% respectively.