Banks get an interest rate rap on their knuckles
The Union finance minister and the Reserve Bank of India have been taking policy decisions to make access to credit easier for both hard-pressed citizens as well as cash-strapped businesses. But what if the banks, which disburse loans, ignore policy guidelines and carry on the way they want? This has been an unstated problem for long and it is good that Finance Minister Nirmala Sitharaman has highlighted that state-owned banks were not lowering interest rates as expected.
This was despite RBI reducing its repo rate (the interest rate at which commercial banks borrow from the central bank) by 185 basis points (1.85%) since February 2019. The repo rate now stands at 4%. It is also commendable that the FM sternly told the bankers to hold board meetings and speed up cuts in interest rates on loans.
Spokesmen for the banks have been stout in their own defence, claiming the banks had lowered interest rates by as much as 120 to 140 basis points, and any further cuts in rates would hereon impact their own profit margins. Banks argue that their own cost of funds is fairly inflexible. Despite easing of rates by
RBI, most bank deposits have long maturity profiles and they are on fixed interest rates.
To lower lending rates but having to pay out much higher interest on deposits would be a business folly.
It is not only poor interest rate ‘transmission’. The finance minister has also prodded the banks over the poor disbursal of loans under the Emergency Credit Line Guarantee Scheme (ECLGS). Under the economic stimulus package, the government envisages a disbursal of Rs 3 lakh crore as additional funding to companies struggling to survive.
However, banks till June 5 sanctioned a mere Rs 17,705 crore in loans and disbursed a measly Rs 8,320 crore. These bankers need to understand these are not normal times and that unless they give a massive credit boost to tottering businesses, the latter are likely to go belly up, sinking thousands of jobs alongside. Slowing down the transmission of monetary policy is the last thing banks should be doing.