RBI to nudge banks to cut lending rates

Reserve Bank of India (RBI) governor Shaktikanta Das is expected to nudge banks to lower their lending rates. The central bank had cut the repo rate by 0.25% on February 7 after a gap of 17 months.

Das is meeting with banks, both private and public sector ones, to discuss issues related to interest rate transmission on Thursday.

The RBI chief is expected to ask why banks are not passing on reduction in interest rates by the central bank to lower lending rates to the borrowers.

RBI had cut the repo rate by 0.25% to 6.25% in its sixth bi-monthly monetary policy review this year but banks hardly budged with any rate cut, except for a State Bank of India which cut its home loan rates by 0.05%.

"The transmission of rates is very important, especially after the central bank announces a rate cut. I'm having an interaction with the CEOs and the MDs of various banks, both private and public sector banks, and that is now scheduled to be held on February 21," Das told reporters. He was in the national capital for the customary post-Budget RBI Board meeting which was addressed by finance minister Arun Jaitley.

"We will discuss the issue with the banks and see what needs to be done," Das added.

However, with credit growth far outstripping the deposit growth, bankers say that there is hardly any leeway to cut lending rates. "We have no headroom to cut lending rates unless we cut the deposit rates. The issue is that we need to cut the rate on the deposit if we need to cut the MCLR (marginal cost of funds based lending rate is the floor below which the banks cannot lend). But the deposit offered by many banks are higher," said Rajnish Kumar, chairman, SBI in an interview with a television channel. Banks have to reduce deposit rates before cutting the lending rates as the cost of the deposits is also one of the components used to arrive at the lending rate.

Bank credit grew at 14.5% to Rs 94.29 lakh crore while the deposit growth lagged at 9.63% to Rs 121.22 lakh crore for the fortnight ending February 1, according to 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, specially in the fourth quarter when the demand for credit is peaking.

Though some credit growth was visible, it was not broad-based. "The aggregate flow of finance and credit to the commercial sector as a whole has shown some improvement. But it is not broad-based. It's not flowing into various sectors the way it should be. It has already been discussed in the monetary policy and we have factored that in our policy," Das added. On the concerns about credit flow to micro, small and medium enterprises (MSMEs), Das said it was for the banks to pass on the benefit of the restructuring scheme to the small industries.

On January 1, RBI had announced a restructuring package for MSME units having an outstanding loan of up to Rs 25 crore each. "All those cases are covered in that restructuring package. Now the ball lies in the court of the banks to restructure the loans of the eligible MSMEs as per the guidelines of the MSME package," Das said.

Commenting on mergers in the banking space, Jaitley said that the country needed fewer and mega banks which were strong. He said that the experience had been that of the State Bank of India merger and now the second one was taking place. Last month, the Union cabinet cleared the merger of Vijaya Bank and Dena Bank with Bank of Baroda, making it the third largest bank after SBI and ICICI Bank.