• Monday, 20 May 2019

Banks raise margin protection, headroom issues on RBI's rate cut transmission call


Feb 22, 2019 (3 months ago) |
New Delhi, Feb 21 : Reserve Bank of India (RBI) Governor Shaktikanta Das on Thursday met PSU and private sector banks CEOs and MDs to discuss rate transmission and persuade them to pass on the advantages after taking note of the non-passing of the benefits of lower interest rates to the consumers following a key policy rate cut by it recently while the banks are said to have raised their concern on protecting their margins to provide for the NPAs and banking operations which may be hit if they start passing on the full rate cut to the consumers.
Earlier this month, the RBI cut the benchmark interest rate by 0.25 per cent to 6.25 per cent. But banks have so far cut only 5 basis points after the rate cut. According to a banking chief present at the meeting held in Mumbai, after the April MPC meeting of the RBI, if there is a rate cut further by the central bank, then banks would feel comfortable to pass on full benefits. SBI has cut the interest rate by just 0.05 per cent .

As a policy step, RBI has the power to issue instructions to the banks to pass on the benefits but in today's meeting the discussion was on listening to the bankers' side also and the Das listened to them as well on their limitations, said a source. Banks lend on the basis of MCLR, PLR and base rates.

Concerns over a full pass-through of lower interest rates to the economy emerged after lenders lowered lending rates by only 5 basis points after a 25 basis point rate cut by the RBI in early February, raising questions on the efficiency of monetary policy transmission.

A former bank chief said the rate cut by RBI to translate directly into loan rate cut is not that easy. Banks have to reduce deposit rates for reducing MCLR rates who also have the challenge to raise the deposit growth and lower deposit rates don't attract savings. And here the situation is not very bright as credit growth has been 9.3 per cent versus 6.1 per cent deposit growth of the banks.

Banks also have to protect their margins to provide for the NPAs and meet other banking expenses, so if they go on passing the full rate cut, they would have a weak financial base again eroding their margins.

This has been expressed by the SBI chairman recently as Rajnish Kumar said that the bank currently does not have any headroom to cut interest rates. Many other banks aslo expressed similar views in the meeting.

The RBI is mandated to see whether banks are cutting lending rates in line with repo rates.

The home loan borrowers have often complained about the opacity of the interest rate fixing mechanism which allows banks not to pass rate cut benefits in lowering home and auto loan rates.

"Transmission of rates is very important especially after the central bank announces a rate cut," Das had said after its board meeting in the capital.

(Anjana Das can be contacted at anjana.d@ians.in)

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