RBI Governor Urjit Patel goes for status quo, puts onus of rate cuts on banks

By: | Updated: February 9, 2017 4:30 AM

While most banks have aggressively been cutting lending rates since demonetisation in November, the Reserve Bank of India (RBI) governor Urjit Patel believes that lenders have space for more cuts in future.

RBI Governor Urjit Patel. (PTI)RBI Governor Urjit Patel. (PTI)

While most banks have aggressively been cutting lending rates since demonetisation in November, the Reserve Bank of India (RBI) governor Urjit Patel believes that lenders have space for more cuts in future.

Patel told reporters on Wednesday that there is still room for lending rates to come down as RBI’s policy rates have come down by 175 basis points, and in comparison, the weighted average lending rate (WALR) has come down at the most by about 85-90 bps.

So, I think there is scope for some more transmission. Some of the healthy borrowers, sound borrowers from the housing segment have already been benefited from it,” he explained.

The lending cuts began in January when State Bank of India reduced its marginal cost of funds-based lending rate (MCLR) for the month by 90 basis points (bps). The bank’s home loan rate is pegged on its one-year MCLR at 8%.

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Leading banks have lowered their incremental lending rates by anywhere between 60 and 115 bps since June, even as the Reserve Bank of India (RBI) lowered the repo rate by only 25 bps during the period.

Much of the reduction in rates followed the deluge of deposits into banks in the wake of demonetisation and a resultant drop in their cost of funds. Under the marginal cost of funds-based lending rate (MCLR) regime, banks have to review their lending rates every month on the basis of their incremental cost of funds, among other factors.

While the repo rate has moved to 6.25% from 6.5% at the beginning of June, the country’s largest lender, State Bank of India, reduced its one-year MCLR to 8% from 9.15% over the same period. The rate on SBI term deposits with maturity of one year has dropped to 6.9% from 7.25% at the beginning of June.

The corporate bond market too has seen a fair bit of transmission. The FIMMDA yield on one-year AAA-rated paper has fallen 96 bps since the beginning of June to 6.92% on February 8.

ICICI Bank, HDFC Bank and Axis Bank have cut their one-year MCLRs by 95 bps, 100 bps and 110 bps, respectively, since June.

Crisil said in a note on Wednesday that this fiscal (FY17), transmission has improved a touch because of demonetisation-driven liquidity, introduction of the MCLR, and successive reduction in small savings interest rates.

In order to achieve monetary transmission by ensuring that lending rates are sensitive to policy rates, the Reserve Bank of India has made it mandatory for banks to adopt the MCLR as the benchmark for lending, instead of the base rate, from the beginning of FY17.

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