Lower rates not enough to interest clients

By: | Updated: August 18, 2016 6:48 AM

Axis Bank on Wednesday lowered its marginal cost of funds-based lending rate (MCLR) by 5 basis points across maturities, a sign banks are trying to stoke demand, reports fe Bureau in Mumbai.

KKRWith banks reluctant to lower loan rates meaningfully, borrowers have been tapping the corporate bond market. Between April and July, firms raised R1.71 lakh crore, similar to that raised in April-July 2015. (Express Archive)

Axis Bank on Wednesday lowered its marginal cost of funds-based lending rate (MCLR) by 5 basis points across maturities, a sign banks are trying to stoke demand, reports fe Bureau in Mumbai. However, even after the cut, the bank’s one-year MCLR at 9.25% is a good 15 basis points higher than that of State Bank of India, HDFC Bank and ICICI Bank. On July 20, Axis Bank had reduced its base rate by 10 bps to 9.35%.

With banks reluctant to lower loan rates meaningfully, borrowers have been tapping the corporate bond market. Between April and July, firms raised Rs 1.71 lakh crore, similar to that raised in April-July 2015.

Non-food credit growth for the fortnight ended June 26 was 9.48% year-on-year. Between April and June 26, loans to companies and individuals fell 90% year-on-year. Senior bankers have, however, expressed concern at lowering lending rates meaningfully. They believe deposit rates cannot be dropped beyond a point as it would endanger the liability franchise.

The Reserve Bank of India introduced MCLR because while it has been lowering the key policy rate with a view to enabling banks to lower loan rates, despite a 125 bps cut in the repo rate in 2015 from 8% to 6.75%, banks reduced base rates by a maximum of 70 bps. SBI, for instance, reduced its base rate from 10% at the beginning of CY15 to 9.3% by the end of it.

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Moreover, although the MCLR has not been in effect for even five months, the RBI has already said that it is looking to revise the mechanism. “Earlier, some bankers said that it was the lack of liquidity that was holding rates high, now I hear from some that it is fear of the 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,” RBI governor Raghuram Rajan said in his monetary policy statement earlier this month, expressing disappointment that banks had not passed on the benefits of lower policy rates to borrowers.

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