While describing the transmission of the policy rates into lower lending rates still a ‘work in progress’, Reserve Bank of India governor Raghuram Rajan said it is possible that banks could lower lending rates as their deposits keep growing.
Rajan said the RBI has noted that the transmission of the policy rates into bank lending rates still remain ‘work in progress’ and it will shortly review the operations of the marginal cost of funds-based rate (MCLR) lending framework to resolve any issues.
According to Rajan, while the credit growth was not very strong in April and May, the deposit growth was fairly strong. RBI data showed that non-food credit growth stood at 10.1% to R71.4 lakh crore during the fortnight ended May 13, while growth in deposits was at 9.84% to R95.42 lakh crore in the same period.
The central bank has reduced the repo rate by 150 basis points (bps) since January 2015 and banks have reduced their lending rates by close to 110 bps, if MCLR is taken into account. The lowest rate, or the overnight MCLR, stands at 8.9% for public sector lender State Bank of India (SBI) and private sector lender HDFC Bank. 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 have no 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 lowest base rate, at present, is 9.3% for SBI and HDFC Bank.
“My hope is as deposits keep building up, on the liability side banks will then find more for a need to make those deposits go to work other than through investment in government securities,” he said, adding that banks will then start giving out more loans, look for borrowers and therefore start reducing rates even further.
“This is why we need to give MCLR a little bit of time which is why I don’t want to pronounce judgement immediately. But we will see as we get a little bit of experience is it working as advertised and are the banks then passing through rates into lower rates for customers,” Rajan said, adding that the RBI will refrain from pressuring banks to move existing customers to MCLR.
The RBI, Rajan said, does not want to interfere in contractual obligations. “A number of contracts have been written on the base rates at some point in time. For us to say base rate is going to end today would not be appropriate,” he explained.