RBI Governor asks banks to speed up linking interest rates to repo

RBI may look at formalising the system for quicker rates transmission

PTI8_19_2019_000024A RBI Governor Shaktikanta Das addresses a session at the FIBAC 2019, in Mumbai | PTI

The Reserve Bank of India (RBI) is keen to see faster transmission of lower interest rates by banks with Governor Shaktikanta Das calling on the lenders to speed up the process of linking interest rates on new loans to the central bank's repo rate or any other external benchmark. The RBI may at some point have to look at formalising the system, he added. 

Between April and June, the RBI reduced its benchmark repo rate by 75 basis points; however, banks had only cut interest rates by 29 bps. 

Earlier this month, the monetary policy committee of the central bank cut the repo rate by an additional 35 bps. Post that, several banks have announced a reduction in interest rates. Several banks have also started linking their rates to the repo rate or other external benchmark, a move that will ensure a faster transmission of interest rates. The governor feels this needs to pick up pace. 

"Earlier SBI and now other banks have linked their new loans to the external benchmark in the form of the repo rate. I expect more initiatives and this process to become faster. A time may come when I think perhaps we need to formalise this arrangement," said Das. 

He was speaking at the annual banking conference organised by industry body FICCI and Indian Banks Association. 

RBI has so far cut its repo rate by 110 bps as it looks to lift slowing economic growth. Economic growth in the January-March quarter had slipped to 5.8 per cent. Slowing consumer demand, lower rural wage growth and stress in the non-banking financial services sector, has led to growth slowing across sectors like automobiles and consumer goods. Private investment has also slowed. 

A faster lowering of interest rates is essential as it could help investments as well as consumer spending pick up. 

Das reiterated on Monday that growth remained the highest priority right now. 

A key driver of credit in India's economy, especially to the small and medium enterprises, have been the NBFCs. These so-called shadow banks, including housing finance companies, accounted for almost 25 per cent of the banking system. After the defaults by major infra lender IL&FS last year, NBFCs have been facing severe liquidity stress as investors, banks and mutual funds have reduced their exposure to the sector.

Das said there was no immediate plan for an asset quality review of NBFCs, but around 50 of these institutions were being monitored to ensure stability and avoid collapse of any large NBFC. Governance and risk management structures at NBFCs are also being looked at. 

"It is our endeavour to have an optimal level of regulation and supervision so that the NBFC sector is financially resilient and robust. We will not hesitate to take whatever steps are required to maintain financial stability in the short, medium and the long-term," said Das. 

He also said the Reserve Bank is keeping a close watch on the interconnectedness of banks and non-banks.  

"We have seen in the recent past, the build-up of risks among regulated entities due to interconnectedness, exposure concentrations, non-transparent market practices, governance deficiencies, and their contagion effects have repercussions for financial stability. The working group on Core Investment Companies (CICs) has already started its deliberations and based on its recommendations, the Reserve Bank proposes to carry out necessary changes in  the regulatory  architecture for CICs," Das said. 

The central bank is also in the process of  building a specialised regulatory and supervisory cadre for regulation and supervision of banks and non-banks.   

SBI loans to be repo-linked for new customers

Meanwhile, speaking on the sidelines of the conference, Rajnish Kumar, the chairman of India's largest lender State Bank of India, said it was not possible to reprice existing loans, and loans will be repo-linked for new customers. 

"As we create flexibility on the liability side, to link our liabilities to external benchmark, we will pass on everything to borrowers," said Kumar. The lender aims to link more of its products to the repo rate. 

The government as well as RBI has announced several measures to ease the liquidity woes of the NBFCs. Last week, the finance ministry notified norms for the one-time credit guarantee scheme for state-owned lenders on pooled NBFC assets, which was announced in the budget. 

Kumar feels enough measures had been taken for the shadow banking sector and it was now for the execution and roll out of the same by banks.