RBI Monetary policy: Loans likely to become cheaper by 30 basis points

RBI move to exempt banks from maintaining CRR may free up to Rs 2 trn for lending to retail and MSME segments, says ICRA

Banks will have the incentive to give loans of almost Rs 2 trillion and cut interest rates by up to 30 basis points (bps) because of micro, small and medium enterprises coming out of the purview of the cash reserve ratio (CRR).

Lenders said the move would make banks focus more on retail and SME segments at a time when demand from corporate and infrastructure is tepid. These measures are also expected to propel banks to put in extra efforts to fill in the space vacated by finance companies and housing finance firms facing liquidity challenge.

The Reserve Bank of India (RBI) said commercial banks can deduct the equivalent of incremental credit in retail and MSMEs segment over and above the outstanding loans at the end January 2020 from deposits for maintenance of CRR. This exemption will be available for incremental credit extended up to July 31.  

The RBI also announced steps under long-term repo operations (LTROs) for improving monetary transmission to assure banks about the availability of durable liquidity at reasonable cost, relative to prevailing market conditions. The RBI will conduct term repos of one- and three-year tenors of appropriate sizes for an amount of Rs 1 trillion at the policy repo rate. At present, policy repo rate is 5.15 per cent.

A banking sector analyst said the CRR cut could help banks save up to Rs 5,000 crore for the entire system, which can be passed on to customers. This is not much, considering the housing loan portfolio of banks is at Rs 13 trillion and vehicle loans at Rs 2 trillion. These sectors are also growing at 17.6 per cent and 7.2 per cent, respectively.

Karthik Srinivasan, group head of financial sector ratings, ICRA, said banks may be in a position to give additional loans worth Rs 2 trillion in retail and MSME space due to CRR exemption and liquidity tools. The relief due to CRR exemption could be Rs 4,000 crore.

“CRR frees us some amount of cash, and if that can be deployed gainfully, it will add to bank’s profitability,” said Mrutyunjay Mahapatra, MD and CEO, Syndicate Bank. Ashok Kumar Pradhan, MD and CEO, United Bank of India, said foreign banks are likely to benefit more. “Those banks, which have low CASA mobilisation, will benefit from this move. Banks will be able to pass on up to 15 bps benefit to borrowers on reduction in cost of funds,” he said.

RBI Governor Shaktikanta Das said transmission of 135 bps cut in repo rate to the credit market is gradually improving. RBI’s Monetary Policy Committee has cumulatively reduced the policy repo rate by 135 bps since February 2019.

Banks have passed on the benefits of policy rate cuts to customers, especially retail and small enterprises. Marginal cost of funds-based lending rate (MCLR) for one-year tenor declined by 55 bps during February 2019 and January 2020. The weighted average lending rate (WALR) on fresh rupee loans declined by 69 bps and the WALR on outstanding rupee loans declined by 13 bps during February-December 2019. 

Also, most banks have linked their lending rates for housing, personal and MSEs to the policy repo rate of the RBI.

During October-December 2019, the lending rate of domestic (public and private sector) banks on fresh rupee loans declined by 18 bps for housing loans. The cut was much higher at 87 bps for vehicle loans, and 23 bps for loans to MSMEs.