Central bank may cut repo rate by about 25 bps to 4.9%, but slowing loan growth is an area of concern
Loan growth has been slowing sharply and remains the biggest problem for Reserve Bank of India (RBI) rather than transmission. Between March end and November 8, loans to companies and individuals have increased by just 0.43% toRs 97.67 lakh crore. That’s despite the fact that liquidity is ample and the surplus has averagedRs 2 lakh crore over the past many months.
The RBI will meet on December 5 to review monetary policy measures and while it may cut the repo rate by about 25 basis points to 4.9%, it is slow credit that is stalling the economy. India’s GDP grew at just 4.5% in the three months to September, the slowest in six years.
Loan growth measured year-on-year, is at a two-year low. As on November 29, the banking liquidity surplus stood at Rs 2.5 lakh crore, according to the Bloomberg liquidity index. In the fortnight to November, loans to companies and individuals grew at just 7.9% y-o-y. Analysts at Jefferies have noted that system credit growth (with NBFCs) is around 7.2% compared with 15% in November 2018.
Given how deposits have been growing at close to 10%, banks have been able to lower the interest rate on deposits; indeed at State Bank of India (SBI) the one-year marginal cost of funds rate (MCLR), which was 8.4% in June, has come down to 8% in November but the interest rate on a one-year fixed deposit has fallen by much more. This is true for several other banks who are taking care to protect their margins.
Transmission — of the cut in repo rates to loan rates — has been slow; while the RBI has cut the repo rate by 110 basis points since April banks have cut their marginal cost of funds rate by a much smaller amount.
The RBI said in October, monetary transmission has remained staggered and incomplete. “As against the cumulative policy repo rate reduction of 110 bps during February-August 2019, the weighted average lending rate (WALR) on fresh rupee loans of commercial banks declined by 29 bps,” the RBI said.
The RBI mandates SLR at 18.5% but banks are holding excess securities; the excess SLR is estimated at 5%. Investments by banks in G-Secs increased byRs 3.72 lakh crore between end-March and November compared withRs 1 lakh crore in the corresponding period in the previous year.