On rate transmission, Rajan won’t take no for answer

By: | Published: June 3, 2015 12:11 AM

The RBI came down heavily on banks for a second time in quick succession, prodding them to cut lending rates and clean up their balance sheets of troubled assets or make requisite provisions.

Governor Raghuram Rajan said banks will have to cut lending rates going ahead or face the prospect of losing market share to other instruments, such as commercial papers and bonds.  “Banks will have to figure (it) out. They keep their margins right now and lose market share, or cut margins and keep market share,” said Rajan  at a press meet on Tuesday.

The RBI slashed its key policy rate — the repo rate — by 25 bps to 7.25%, citing fall in inflation. However, it raised its forecast of inflation by January 2016 to 6% from 5.8% indicated in the previous policy.

Indian companies have been increasingly opting to raise funds through commercial papers, the rates of which fell to a two-year low just a day before the policy release.

Bankers have said the policy rate cut will be passed on, but not immediately. Rajan pointed out that interest rates were falling even before RBI started slashing repo rate in January. In a separate conference call with analysts, Rajan added that he expects full transmission of rate cuts by banks.

To be fair, most banks have cut their base rates after the central bank’s two rate cuts in January and March, adding to a total reduction of 50 bps. Tuesday’s cut will take the total policy rate reduction to 75 bps.  State Bank of India slashed its base rate by 15 bps on Tuesday.

However, most banks’ base rates have come down, at best, by 30 bps so far. On the other hand, rates on CPs have fallen by 50 bps since January.

Rajan also pulled up banks for their demand on forbearance. “What we want is a quick clean-up of balance sheets and restructuring of situations where assets can be put on track,” Rajan said.

The RBI had stopped its forbearance on restructured assets as of April 1, which meant that banks now classify any loan restructured as a bad loan and provide 15% rather than the previous label of restructured loan that attracted only 5% provisioning.  Most PSBs and some private banks posted a sharp rise in slippages from restructured loans in

January-March quarter. The gross NPAs of banks as of March end have risen to 4.45% of total loans while stressed assets are a massive 10.9% of loans.

New bank licences

Rajan said the RBI may announce at least one set of new bank licences—either small banks or payments banks — by August end. The regulator is also assessing market regulations to see where there is scope for further liberalisation, he sai.

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