Lower EMIs: RBI Gov raises fresh hopes

Reserve Bank of India (RBI) Governor Urjit Patel on Wednesday gave fresh hope to retail banking customers who are still expecting lower EMIs on their loans. After keeping the policy rates unchanged on Wednesday, Patel said there remains room for interest rates to come down.

"Our policy rates have come down by 1.75 per cent while weighted average lending rates (WALR) have come down only by 0.85-0.90 per cent. I think there is scope for more transmission," said Patel.

Banks may still have headroom to cut lending rates as loan growth continues to crawl at a decade-low 5 per cent and the banking system remains flush with funds post-demonetization. Deposits grew by 13.9 per cent to Rs 105 lakh crore, according to the latest data from RBI. The huge surplus with banks is pushing down the cost of loans. Though bankers are not ruling out a cut in interest rates, a repo rate cut from the RBI would have immediately brought down lending rates.

However, Arundhati Bhattacharya, chairman, State Bank of India (SBI), told DNA: "The scope for reducing lending rates is low. Faster recapitalisation is something all banks will welcome." While the SBI reduced its marginal cost-based lending rate (MCLR) by 90 basis points in January, it reduced its base rate by only 5 basis points.

The RBI policy statement, meanwhile, said that for faster transmission of interest rates, there needs to be a reduction of gap between the interest on small savings and bond yields by fully implementing the formula for linking the interest on small savings schemes to change in yields on government papers of similar maturity, resolving the bad debt problem of banks and also faster recapitalisation of banks.

The bulk deposit rates of banks are set to fall further while the banks' ability to reprice retail term deposits are getting tighter. There is talk of cutting the savings bank rate which is at 4 per cent for most banks so that their cost of funds comes down further and loans can be made cheaper.

According to RP Marathe, managing director and CEO, Bank of Maharashtra, the banks are already doing their bit, aided by easy liquidity in the system. "We have reduced the marginal cost-based lending rate (MCLR) by 0.20 per cent in February, resulted in a cumulative 0.90 per cent cut in the last five months. The future course on MCLR will be purely governed by trends in underlying parameters like the marginal cost of funds, negative carry and cost of operations. However, we are confident that any uptrend in the credit off take will be fully supported by banks," he said.

"In the last two months, bank loan rates have been going down without RBI reducing rates. So if the cost of funds continue to fall and credit growth does not pick up, we will be forced to cut our lending rates," said RK Bansal, Executive Director, IDBI Bank.

Banking liquidity surplus improved for the week ending February 4, with the weekly average surplus at Rs 3.2 trillion as against Rs 2.5 trillion in the previous week ending January 27. The improvement in liquidity surplus was largely led by short-term bonds maturing releasing Rs 950 billion last week along with month-end government spending.

The RBI started reducing repo rate since January 15, 2015, when the rate was brought down to 7.75 per cent and since then it has cumulatively reduced the rates by 175 bps. The last time it lowered the rate was in the October 2016 policy announcement, which was also Patel's maiden policy review as governor and also the first by the six-member Monetary Policy Committee that Patel heads.