Borrowing costs will fall for just top-quality firms

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Published: August 7, 2019 4:36:32 AM

Even if there is more transmission, with the fear of NPAs rising, banks will raise risk premium for weak borrowers

NPA, stressed assets, finmin, staff accountability, SBI, Nirmala Sitharaman, operating profit, provisions, loss, Punjab National Bank, PNB gross NPA, NCLT, Essar Steel, Bhushan Power & Steel, NCLT accounts, retail sector

Given how inflation is expected to stay benign and growth is sputtering, there is a strong probability Reserve Bank of India (RBI) will trim the repo rate by 25 basis points later this week, taking it to 5.5%. That would be the lowest levels since April 2010. The RBI has already cut the repo thrice in 2019, by 25 basis points each time. Despite the chunky 75 bps cut, however, there has been little transmission into lower loan rates.

Weighted average lending rates have been broadly flat over the past nine months, though some banks have lowered rates by 5-15 bps between March-May. Most private sector banks left lending rates intact—indicating pricing power—while public sector banks have lowered rates. In general, deposit rates remain sticky; some lenders have lowered rates between 10 and 25 basis points. To be sure, monetary policy works with a lag, but at this point, it is hard to see much transmission. For one, unless they are able to lower term deposit rates meaningfully, banks would be wary of lowering loan rates and exposing themselves to a margin contraction.

Also, at a time when the economic environment isn’t exactly robust, there is a dearth of quality borrowers. Banks are, therefore, understandably becoming choosy about who they lend to. Consequently, while the MCLR may fall, the end rate to the customer may not as the risk premiums are being raised.

Economists believe that if the central bank reassures lenders that liquidity will remain in a surplus—as it is now—for a sustained period, banks would be more open to lowering lending rates. Given how the NPA cycle doesn’t seem to be coming to an end—the June quarter has seen high slippages, and there could be more in the offing—it is doubtful that banks will want to drop rates for weaker companies, if at all they lend to them. It is unfortunate, but given the spate of downgrades for some time at least, only top-quality borrowers are likely to benefit from lower rates; the broader swathe of businesses with ratings below a certain level, will need to fork out a higher risk premium.

One cannot blame the banks because the environment is a very difficult one. The government should refrain from asking banks to lend to customers who are not creditworthy because it could end up in bigger credit costs and weaken lenders’ balance sheets. Recently, it came to light that a large lender had tightened lending norms for automobile dealers; the bank was absolutely justified in doing so since auto sales are weak and dealers could well default. The government should not ask for these rules to be eased because that could backfire badly.

Ultimately, banks must be free to use their discretion. The short point is that, in a fragile economic environment, expecting lenders to lower loan rates is somewhat unreasonable. SBI Chairman Rajnish Kumar said on Monday that there was ample liquidity in the banking system, but it was the demand that was subdued. So, if banks want to compete, they would be willing to lower rates. In sum, while a repo cut will lower the cost of wholesale borrowings, it is the economic environment and the creditworthiness of borrowers that will determine how much and how quickly lending rates come down.

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