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Bankers’ message to Reserve Bank of India (RBI) governor-designate Urjit Patel on the first working day after the announcement of his selection for the top job might not be music to ears. The lending rates would come down only slowly and that too depending on signs of a credit pick-up and comfortable liquidity position.
In the words of State Bank of India Chairman Arundhati Bhattacharya, lending rates will be a function of liquidity and pick up in credit demand. The SBI group, including associate banks, has a 22 per cent share in banking system’s business.
Banks are not in a position to compress margins, as they have to provide for credit costs, Bhattacharya said at the annual convention of Indo-American Chambers of Commerce here on Monday. Tepid credit growth, coupled with reduction in lending rates and reversal of interest income on loans treated as non-performing assets, has eroded the net interest margins of banks.
Concurring with her views on the gradual pace of softening of interest rates, Arun Tiwari, chairman of Union Bank of India, said rates were expected to dip by 25 basis points by the end of this financial year. P Jayakumar, managing director and chief executive of Bank of Baroda, indicated a similar amount of decrease in rates before the close of the year.
Samiran Chakraborty, chief economist at Citi India, said for further easing of rates, RBI should be in a position to remove the words “upside risks to Inflation”.
Banks’ credit growth has remained under 10 per cent for long. For the 12 months ended August 5, it was 9.8 per cent, compared to 8.9 per cent clocked for the previous 12 months, according to RBI data.
Cutting interest rates on loans has been a point of friction between banks and the banking regulator for over a year. RBI began cutting rates from January 2015 and has reduced repo rate, the key benchmark rate, by 150 basis points to six per cent till date. However, banks have reduced loan rates by only 70-80 basis points.
While announcing its monetary policy for 2016-17 in April, RBI moved from a stance of keeping liquidity in deficit mode to keeping it in neutral mode.
Nudging banks to pass on the benefit of softer rates to customers, RBI in third policy review in early said despite easy liquidity, banks had passed past rate cuts into lending rates only modestly.
RBI governor Raghuram Rajan in his cryptic style had said bankers would look for new reasons to prolong the decision for reducing rates.
“Earlier, some bankers said it was the lack of liquidity that was holding rates high; now I hear from some that it is fear of FCNR(B) redemptions that is making them reluctant to cut rates. I have a suspicion that some new concern will crop up once the FCNR(B) redemptions are behind us,” he had said.
After reviewing feedback on the working of marginal cost-based lending rate (MCLR), RBI will soon revise the framework. RBI-mandated MCLR regime from April this year to improve transparency in pricing loans.
The substantial pass-through will happen only as corporate credit demand picks up, and public-sector banks, strengthened by clean balance sheets, compete for corporate business, Rajan said in the August policy.
