With commercial banks having a tendency to reduce interest rates only for prospective customers in order to push new business, Reserve Bank of India (RBI) Governor Urjit Patel said he expected lenders to pass on lower loan costs to borrowers who had not received the full benefit of the reductions in the policy rate.
On Wednesday, the RBI cut the policy repo rate by 25 basis points (bps) to 6%. A percentage point comprises 100 bps.
The banking regulator noted that banks mainly reduced rates for segments where competition was high as in the case of home loans and personal loans.
“The way to look at the transmission is to determine what has been the case since we started the easing cycle,” Mr. Patel said. “On new lending, the transmission has been much stronger, specially in those segments where there is lot of competition - housing loans, personals loans where the NBFCs also play a big part.”
The central bank has reduced the repo rate by 200 bps since January 2015.
While banks cut the marginal cost of funds based lending rate (MCLR) sharply in January — by up to 90 bps — the reduction in the base rate, which was the earlier loan pricing regime, was much lower. Since MCLR has been operational only from April 2016, a large proportion of loans are still linked to the base rate and such borrowers have not benefited to the extent of the new borrowers.
“The loan portfolio that is tied with on account of base rate and liabilities of longer nature the transmission has been slower,” Mr. Patel said. “Given the liquidity conditions prevailing and that we have reduced the policy rate by a substantial amount since the easing cycle started, I think there is scope for banks to reduce” rates for borrowers who have not yet gained the full benefit of the RBI’s policy rate cuts, he added.
The difference between the base rate and MCLR, for some banks, is as high as 90-100 bps.
For example, State Bank of India’s MCLR is 8% and its base rate is 9% and for ICICI Bank, MCLR is 8.2% and base rate is 9.1%.
The RBI said it will address Base Rate rigidity to improve transmission.
“Given a large part of the floating rate loan portfolio of banks is still anchored on the Base Rate, the RBI will be exploring various options in the near future to make the Base Rate more responsive to changes in cost of funds of banks,” RBI said.
The central bank has also constituted a committee to study the various aspects of the MCLR system from the perspective of improving the monetary transmission and said it would explore linking of the bank lending rates directly to market-determined benchmarks.
The Group will submit the report by September 24, 2017.
