MUMBAI: Many large public sector banks such as Bank of Baroda, Punjab National Bank, Bank of India, and Uco Bank have reduced their repo-linked lending rates by a full 50 bps to their existing borrowers in response to the Reserve Bank’s unconventional 50 bps reduction in the repo rate to 5.5% last Friday. Also slashing the cash reserve ratio (CRR) by a steep 100 bps to 3% in a staggered manner between September and end-November which will help them protect their margins which have been under pressure since long due to higher pricing of deposits.
The 50 bps repo cut announced on June 6 is the steepest since May 2020 in response to the Covid pandemic when the RBI slashed it by a steeper 75 bps, while the 100 bps CRR is historic. The CRR reduction will release Rs 2.5 trillion in lendable money to banks, which means they can lend 10x more or worth Rs 25 trillion. The CRR will be reduced in four equal instalments of 25 bps each beginning September 1 and ending November 29. This will also protect banks’ margins, which Crisil considers to boost their NIMs by 10-15 bps.
Leading the rate-reduction bandwagon are major public sector banks such as Bank of Baroda, Punjab National Bank, Bank of India, and Uco Bank which have reduced their repo-linked lending rates (RLLR) by a full 50 bps.
This means that existing home and auto loan borrowers would see their EMIs fall considerably or their loan tenor coming down. Typically for a Rs 50 lakh loan, a 25 bps reduction in interest rate means, EMI coming down by a month. In the present case, it means the loan tenor is down by two EMIs.
Bank of Baroda has cut its RLLR from 8.65% to 8.15% effective June 7, while PNB’s rate will be down from 8.85% to 8.35%, starting June 9, and Bank of India has lowered the rates from 8.85% to 8.35% effective June 6 itself. Uco Bank has reduced its RLLR from 8.80% to 8.30% and has also cut its MCLR by 10 bps across all tenors.
However, the private sector peers who are more cautious of their margins are taking a more calculated approach, following suit with marginal reduction (10-20 bps) in MCLR rates. This is permissible as the RBI mandates banks to lower the repo cut only from the first day of the next month and not immediately.
Among the private lenders, HDFC Bank has cut its MCLR across tenures by 10 bps, effective June 7; Karur Vysya Bank has cut MCLR by 10-20 bps. But ICICI Bank and Axis Bank are yet to offer any reductions.
Industry leaders SBI and HDFC Bank have home loan rates as low as 8% now and if they pass on the entire benefit to existing customers their rates will be 7.5% for loans above Rs 50 lakhs and under 8.5% for lower loan amounts.
For the system, the rate cut move by the central bank means, better rate transmission. System-wide only almost 45% of loans are repo-linked but all new retail loans have to repo-inked. Repo linked loans came into force in October 2019.
RLLR is the rate at which banks lend to customers whose loans are directly linked to the repo rate, while the marginal cost of funds based lending rate (MCLR) is the minimum interest rate that a bank can offer on loans, determined by factors such as the bank’s cost of funds, operating expenses, and required margins, and typically responds more slowly to policy rate changes than repo-linked rates.
While the move is favourable for existing borrowers, it has implications for depositors as banks are expected to cut pricing of fixed deposits and other term instruments, in line with falling lending rates and increased liquidity. Motilal Oswal estimates 30-70 bps in fixed deposit returns across tenures sooner than later.
While repo-linked loans respond instantly to monetary policy changes, deposit rates tend to adjust more slowly due to regulatory norms and competitive market pressures. As a result, lenders may face margin pressure, the firm noted in its report, over the next two quarters until deposit repricing aligns with the new rate environment.
The 100-bps phased reduction in the CRR will inject Rs 2.5 trillion into the banking system, with which they can make incremental lending of 10 times more—or worth Rs 25 trillion. Crisil sees the NIM compression which was seen at 10-20 bps earlier due to the past two repo reduction of 25 bps each in February and April, now coming down to 5-15 bps only.
“The CRR cut will support NIMs in two ways. One is the direct addition to income from the flexibility to deploy the funds till now parked as the CRR into the business. Two, more systemic liquidity after the CRR cut and the RBI’s other measures will ease pressure on the cost of deposits, offsetting the downward pressure on NIMs,” Ajit Velonie, a senior director with Crisil said.
“The frontloading of the repo rate cut will have had a somewhat higher impact on the yield side of NIMs than previously expected. This is because 45% of the overall loan assets are linked to an repo-linked now. Typically, these are repriced rapidly after rate cuts. On the other hand, the MCLR -linked loans are re-priced at a relatively slower pace and by a lower extent than the external benchmark-linked loan rate. The frontloading thus accentuates the impact on loan yields,” Velonie said.
According to Subha Sri Narayanan, a director with Crisil, “the direct impact on NIMs will be from the flexibility to deploy the Rs 2.5 trillion of liquidity released from the CRR cut into interest-bearing assets. Given the planned staggered implementation, in the current fiscal, this should benefit NIMs by 3-4 bps, while on a full-year basis, there would be a 7 bps benefit. Secondly, the additional liquidity available for lending will ease the pressure on deposit growth that, in turn, increases the flexibility banks have to cut their deposit rates. Overall, we expect the compression in bank NIMs to be 5-15 bps this fiscal, compared with 10-20 bps estimated earlier.”