Banks are set to reduce interest rates, particularly on retail loans like home and automobiles, following an interaction with the Reserve Bank of India (RBI) top brass on Thursday.
Commercial banks have been reluctant to lower interest rates even after the central bank had reduced the key policy rate or the repo rate by 25 bps to 6.25% earlier this month. RBI Governor Shaktikanta Das met the chief executives of banks on Thursday to discuss transmission of the monetary policy rates.
“The central bank is expecting monetary transmission to happen. We have told them we will look into it,” said a banker who was present at the meeting.
While banks have been reluctant to reduce the lending rate after RBI rate cut, during the rate hike cycle of 2018 — when the RBI had hiked interest rates by 50 bps — banks responded by increasing their benchmark lending rate by at least 60 bps.
After the central bank cut rate earlier this month, only the State Bank of India has reduced the interest rate by 5bps on home loans of up to ₹30 lakh.
Bankers said while there is not much scope to reduce the benchmark rate — that is marginal cost of fund based lending rate (MCLR) — the spread between the benchmark rate and the actual lending rate could be narrowed.
Banks typically add a spread over MCLR while pricing the interest rate for a particular loan.
Liquidity deficit
At the same time, the bank chiefs have expressed concern on the liquidity deficit in the system and said the lack of liquidity is not allowing them to reduce deposit rates. Deposit rates are an important component of the cost of funds of banks to which the benchmark rate is linked.
Higher cash holding
Banks have also highlighted increase in cash holding with the public, due to the general elections, which is also causing liquidity shortfall.
Analysts said with the government announcing capital infusion of ₹48,200 crore in public sector banks, the move would also help the lenders to reduce interest rates.
“We grow more confident of our call of lending rates coming off with the MoF (Ministry of Finance) yesterday recapitalising PSU banks by additional ₹482 billion…we expect banks to cut lending rates by 50bp by March 2020,” a Bank of America Merrill Lynch report said, adding the central bank may further reduce interest rate in the next monetary policy review due in April.