Two RBI moves that work for borrowers
4 min read . Updated: 19 Feb 2020, 02:46 PM IST- CRR waiver will benefit new borrowers as well as those on MCLR
- LTRO will ensure banks lower lending rates eventually but only on MCLR-linked loans
Every time the Reserve Bank of India’s monetary policy committee meeting rolls around, borrowers start getting hopeful about a rate cut. So when the central bank kept repo rates unchanged at 5.15% in its sixth bi-monthly meeting for FY20 held on 6 February—after cutting it five times in a row by 135 basis points (bps)—it came as a bit of a disappointment. One bps is a hundredth of a percentage point. Repo rate is the rate at which RBI lends money to commercial banks and serves as a benchmark for most banks to decide their lending rates. A cut in repo rate is supposed to translate into lower lending rates, but rate transmission has been poor in the past. However, two other announcements by RBI are expected to affect lending rates.
To improve credit flow to the housing and auto sectors and to small businesses, the central bank has waived off the cash reserve ratio (CRR) for banks for a limited period. It has also introduced long-term repo operations (LTRO) of one- and three-year tenures to enhance liquidity, credit growth and transmission of policy rates to customers. According to Adhil Shetty, chief executive officer, BankBazaar, an online financial services marketplace, “RBI has taken steps to keep interest rates subdued without reducing the repo rate."
Read on to find out how the two moves will affect borrowers.
CRR waiver
This will ensure that banks have more money to lend to retail borrowers which may lead to softening of interest rates for new borrowers who take repo-linked loans as well as old borrowers repaying loans based on marginal cost of lending rates (MCLR).
CRR is the amount of funds that banks have to maintain with RBI at all times. If the central bank decides to increase CRR, the amount available with the banks for loan disbursal comes down and vice-versa. “RBI announced the relaxation of CRR requirements, and said that new retail and MSME loans disbursed till 31 July 2020 will be adjusted against a bank’s CRR requirements while ensuring that banks meet at least 90% of the requirement. This would allow the banks to monetize more of their liquidity and would ensure that greater financing is available for home and car buyers as well as for MSMEs. Over the next few months, this increased liquidity should soften interest rates further," said Shetty.
Virendra Kumar Sethi, head, mortgages and retail assets, Bank of Baroda, said this could impact all the borrowers. “The CRR exemption will lower the cost of funds of the banking industry. Banks are assessing the impact and this may lead to lower interest rates as banks may pass on the benefit to customers," he said.
Industry experts said that while MCLR can fall due to lower cost of funds, banks may even lower their existing spreads for loans linked to an external benchmark. This means loans may get slightly cheaper in March, even though policy rates remained unchanged.
This could also give the much-needed nudge to the overall economy, especially flagging sectors such as automobile. “CRR exemption on incremental loans for MSMEs, retail automobiles and housing loans will incentivize banks to increase retail lending for cars, residential housing and MSMEs—three sectors crucial for overall economic growth," said Naveen Kukreja, chief executive officer and co-founder, Paisabazaar.com, an online marketplace for loans and credit cards.
Introduction of LTRO
This move will also ensure that banks lower their lending rates eventually but only on MCLR-linked loans.
LTRO helps inject liquidity into the banking system. RBI’s move to maintain status quo on policy rates can be counterbalanced by the introduction of this facility. Through LTRO, the central bank will infuse ₹1 trillion into the banking system in tranches through loans of long-term maturity periods of one year and three years to banks.
Currently, the repo operations are for the short term, usually overnight, and banks can borrow money from RBI at the prevailing repo rate. Through LTRO, banks will be able to borrow one- and three-year loans at the repo rate. This is an unusual move because normally long-term loans have higher interest rates than what is charged on short-term ones.
With reduction in the rates at which banks borrow for the long term, their cost of funds will reduce, which in turn will lead to lower lending rates. “RBI moving from overnight repo to long-term would cause the yields from government securities, which are currently in the 6% range, to bend towards 5.15%, over time. The move is expected to soften yields, lower deposit rates and pull down lending rates with it," said Shetty. In most cases, MCLR is sensitive to the cost of funds of banks. So the introduction of LTRO will reduce the rates for borrowers who still have MCLR-linked loans.
The first tranche of the three-year repo operations was initiated on 17 February for ₹25,000 crore, while the one-year operation will be conducted for the same amount on 24 February. Details of the remaining LTROs will be announced in due course.
Both the waiving of CRR and the introduction of LTRO will add to the liquidity in the banking sector, which will allow loan rates to soften. While the introduction of LTROs will help those who are servicing loans linked to MCLR, the CRR waiver can ease rates for borrowers across the board.
RELATED STORIES
