Capital infusion to banks may be linked to cheaper loan

The Centre’s performance-linked capital infusion in public sector banks may include one more parameter – their ability to transmit the Reserve Bank of India’s (RBI) interest rate cut to actual borrowers.

So far, the RBI has cut the policy repo rate by 110 basis points in the past six months since February but the actual transmission from lenders to loan seekers has not been more than 30 bps, which translates into 0.30% in rate cut to the borrowers.

There has been a sharp increase in the recapitalisation amount to public sector banks since financial year 2018-19. This year’s Union Budget has promised Rs 70,000 crore additional capital in 2019-20.

From 2014 to 2018, the Centre and the Life Insurance Corporation together have infused Rs 3 lakh crore in PSBs, but it has failed to contribute significantly to loan disbursement. This is despite the government getting nil dividends from the PSU banks in the financial years 2017-18 and 2018-19.

According to a recent industry report, a large recapitalisation amount has been used by the PSBs to reduce their losses.

Now, with the industrial slowdown becoming all pervasive and private sector investment remaining almost muted for want of credit, the government has decided to increase vigilance.

“Government wants to have better accountability from the banks before infusing additional capital,” official sources told DH.

Among other things, their ability to transmit the benefits of RBI rate cut will also be judged, they said.

After the RBI’s last rate cut on August 7, India’s biggest bank State Bank of India became the first one to cut its marginal cost of fund-based lending rate (MCLR) by 15 bps across all tenors, effective from August 10 to 8.25%.

MCLR is the minimum interest rate that a bank can lend at and is linked to the actual deposit rates.

Earlier, Bank of Baroda had cut its MCLR by 15 bps effective August 7. Oriental Bank of Commerce and IDBI Bank too have announced a cut in the range of 0.05 to 0.15 percentage points in MCLR for various tenors.

In a post-policy press conference, RBI Governor Shaktikanta Das had rued that banks had passed on only a third of benefits they got from the RBI’s rate cut. Fresh investments can come to the economy only if the cost of borrowing is lowered.