Outgoing Reserve Bank of India (RBI) governor Raghuram Rajan on Tuesday said the central bank expects further transmission of policy rate cuts into lending rates as balance sheets of banks are being cleaned up. Rajan said while the RBI would be happier if there was more transmission, he understands some of the difficulties the banks have. “However, substantial pass through will only happen when corporate credit demand picks up and as public sector banks, strengthened by clean balance sheets, compete for corporate business,” Rajan said.

The governor said despite easy liquidity, banks have only modestly passed earlier rate cuts into lending rates. “Earlier, some bankers had said that it was the lack of liquidity that was holding rates high, now I hear from some that it is the fear of FCNR (foreign currency non-resident account) (B) redemption that is making them reluctant to cut rates.” Rajan said he suspects that some new concern will crop up once the FCNR (B) redemption happens.The RBI, he said, will shortly be suggesting some revisions to the MCLR (marginal cost lending rate) framework.

The central bank has reduced the repo rate by 150 basis points (bps) since January 2015 while banks have cut their lending rates by close to 115 bps if the MCLR is taken into account. The lowest rate, or the overnight MCLR, stands at 8.85% for public sector lender State Bank of India. Although most banks have based their home loans on one-year MCLR, overnight MCLR is used for comparing it to the base rate because both don’t have tenure premium.

However, older borrowers, who still remain under the base rate contracts, have had their rates lowered by a maximum of 70 bps, since only the incremental borrowing from April 1 is based on MCLR.
The cost of deposits, one of the components in determining MCLR, has been declining as banks continue to lower their deposit rates for more than a year now. SBI’s deposit rate for a maturity of up to one year is now 7%. For BoB, it is 7.3% while for HDFC Bank, it is 7.5%.

The share of low-cost deposits is critical since most banks pay customers just 4% on these. At State Bank of India, current and savings accounts account for 43.84% of its total deposits, while for BoB, the proportion is 29.4%. Meanwhile, bank credit has not seen any substantial growth since September 2014, hovering between 9% and 11%.

Although banks have relied a lot on retail loans to grow their loan books, corporate borrowers have preferred the corporate bond market and commercial paper (CP) to raise money.

The governor also announced that the central bank will unveil a set of measures on August 25 to improve the functioning of markets, especially the corporate bond markets. Some of these measures, Rajan said, will be based on suggestions of the Khan Committee report.

Data showed that while banks’ non-food credit grew at 9.87% year-on-year for the fortnight ended July 22 to Rs 71.63 lakh crore, companies have mopped up Rs 1.71 lakh crore through private placement of bonds for the four months to July.

Firms have also tapped the commercial paper market, raising Rs 1.42 lakh crore from April to mid-July.