Banks under pressure from RBI to pass on recent rate cuts to consumers

rbi-pti Representational image | PTI

A recent cut in lending rates of Reserve Bank of India (RBI) to banks did not leave banks all too happy. The banks had expected a hike or continuation of their 6.5 per cent lending rates to the RBI. Instead, the rates were slashed by the Monetary Policy Committee (MPC) in its meeting held earlier this month. Now, the RBI insists that banks pass on the repo rate cut to their customers.

The MPC had earlier cut rates twice in the past nine months. In surveys conducted by RBI, it was assessed that banks had not passed on earlier rate cuts in RBI's lending rates to consumers. Loans, especially housing loans, had not become cheaper in consonance with the rate cuts, the survey presented also to the MPC concluded.

The government has been pushing for a rate cut, arguing that growth parameters are weakening. During the MPC meeting, arguing for the rate cut, RBI Governor Shaktikanta Das had said, “Growth impulses have weakened and there is a need to spur private investment and strengthen private consumption, especially in the wake of slowing global growth.”

To up the growth ante, and bring back fair winds on credit growth, RBI now wants banks to cut housing and other loan rates. It is now conducting a series of meetings with bankers and regional heads of banks to make a case for lower credit rates for their products.

The government, too, is keen on banks reducing their loan rates. "Consumers, for long, have been spending heavily on the acquisition of capital assets. Reducing rates for housing loans, consumer loans and credit card rates will increase spending and boost the economy," said Rajeev Kumar, secretary, department of financial services at the finance ministry.

To make its case stronger, RBI officials recently met up with bankers in the New Delhi region and spelt out the requirement for reducing rates. Banks, in turn, informed that they are neither allowed higher interest on their loans to RBI nor allowed to hold more cash by allowing more loans under the Liquidity Adjustment Facility (LAF) window.

The RBI officials pointed out that banks were allowed by the RBI to hike bank deposit rates earlier. The central bank assessed that steps such as this and additional borrowing allowed to banks under the Marginal Standing Facility (MSF) scheme of the RBI, should end the bank's cash woes.

"Transmission of rates is very important, especially after the central bank announces a rate cut. I will be interacting with CEOs in both public and private sector banks," said Das, after attending the first meeting with bankers in New Delhi.

"There is a trajectory to the bank lending numbers that have witnessed growth and de-growth in the last two years. If we follow that path, it is expected that loan growth alone can drive the banks' business again as well as bring the economy back on the desired growth track," said Das.

The finance ministry is also organising a separate meet for bankers to restructure their loan rates. Earlier, PSU banks had agreed to form a banking consortium, dedicated to lending to MSMEs only. Earlier, Finance Minister Arun Jaitley had insisted that the banks reduce their lending rates for small and medium business.

With these measures, it is now likely that cheaper loan rates would be available for loan consumers. "Any reduction in housing loan interest rates could greatly drive growth in the housing space. A loan rate cut is an actual requirement after the government has paved the way for investment in a second home in this budget," said Boman Irani, chairman, Rustomjee Group, a prominent Mumbai-based builder.

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