Reserve Bank of India (RBI) governor Shatikanta Das met with select bank chiefs in Mumbai to discuss how the cut in repo rate can be transmitted as lower lending rates to borrowers.
The government is trying to push for lower lending rates so that the corporate borrowers could pump in private investments and retail borrowers keep the demand for retail credit such as home loans and car loans buoyant. RBI cut its repo rate or the rate at which it lends overnight money to banks by 0.25% to 6.25% on February 7.
"The repo rate is not one of the components used to calculate the marginal cost based lending rate (MCLR). To bring down MCLR, we need to cut our deposit rates, which are at 7% to 8%," said a banker. But if banks cut deposit rates, the small savers will exit from banks.
RBI, banks said, has promised to inject liquidity to support credit growth.
With 70% of the liabilities of the banking sector being financed by deposits and not from borrowings from RBI or the money market, the cut in the repo impacts only a fraction of the funding cost of banks, say bankers.
Meanwhile, the members of the monetary policy committee (MPC) are of the view that that interest rates need to soften. In the minutes of the MPC meeting released on Thursday, one of the members Ravindra Dholakia said, "I think space has opened up for a substantial rate cut of about 50 to 60 basis points going forward."
One basis point is a hundredth of a percentage point.
"With the policy rate of 6.5%, this implies the real policy rate of about 2.6%, which is one of the highest in the world as I have been arguing. We do not need such a high real policy rate," Dholakia said.
Bank credit grew at 14.5% to Rs 94.29 lakh crore while the deposit growth lagged at 9.63%, increasing to Rs 121.22 lakh crore as of first week of February, according to the latest RBI data.
With deposits growing slower than credit, many banks are facing a resource crunch, making it difficult to cut deposit rate and lower lending rates, especially in the fourth quarter when the demand for credit is peaking.
The heads of State Bank of India, Bank of India, Bank of Baroda and Punjab National Bank and some smaller banks like Indian Bank met with the RBI governor and deputy governors.
"We have told the central bank that is difficult to pass on a cut in interest rates, particularly at a time when deposits are growing slower than credit. With small savings rates higher than bank deposit rates, the resource crunch for the banking sector is going to accentuate by the end of the fourth quarter," said a banker.
The cut in interest rates will also impact the net interest income (NII) of the banking system, which is now at 3%. A 0.25% cut will reduce it to 2.75%, impacting the earnings of banks at a time when they are struggling with non-performing assets.
Banks are facing difficulties in growing their deposits, especially at a time when money small savers are deserting bank deposits for equity investments through various systemic investment plans. It is estimated that Rs 8,000 crore of retail money is being channelised into mutual fund industry for higher returns.
To further aggravate the poor deposit growth, the government on Thursday hiked the rate for Employees' Provident Fund (EPF) by 0.10% to 8.65% for the current financial year. The rate has been hiked for the first time since 2016.
BIG GAP
- 14.5% – Bank credit grew to Rs 94.29 lakh crore for the fortnight ending Feb 1, 2019
- 9.63% – Deposit growth rose to Rs 121.22 lakh crore
- 70% – Of liabilities of banking sector are financed by deposits, not from borrowings from RBI or money market, say bankers
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With 70% of the liabilities of the banking sector being financed by deposits and not from borrowings from RBI or the money market, the cut in the repo impacts only a fraction of the funding cost of banks, say bankers.
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