Bankers buy time to reduce rates

Consumers who expected EMIs (equated monthly instalments) of home and auto loans to come down immediately following the recent 25 bps cut in repo rate by the Reserve Bank of India (RBI) will have to wait for some more time.

The RBI had already cut another 50 bps in two instalments since January.

At the annual review meeting with public and private sector banks on Friday, bankers were unanimous in informing Finance Minister Arun Jaitley that it would take another 2-3 months for them to pass on the benefits to customers.

In their view, transmission of lower rates to customers would be viable only when the cost of funds/deposits — as reflected in the re-pricing of their liability book at the new rate — comes down, and liquidity levels at the new lower costs are tested.

Already industry and retail creditors are hurting because although the RBI has cut interest rates by 75 bps since January this year, banks have effected a corresponding cut of only 25 bps so far.

The country’s largest lender, State Bank of India, has lowered its base rate by 30 bps this year. Its base rate currently stands at 9.70 per cent.

“Some part of the rate cuts has been passed on to customers, while some banks have not passed them on. I feel that over the next few days or weeks, they would be in a position to work out greater cuts,” Jaitley said.

The finance minister also disclosed some of the constraints shared by bankers.
“The banks expressed problems in their balance sheets. They also asked us to take a relook at the small saving schemes, which with their high rates at 8.5-9 per cent, is pushing up deposit costs. The banks also said that when the RBI raised repo (RBI’s short-term lending rate) rates, they were slower to raise their interest rates, and now they are also slower to bring them down.”

Following his meeting with RBI Governor Raghuram Rajan on Thursday, Jaitley was expected to take up the matter of banks passing on the benefits of RBI’s earlier rate cuts to customers.

 Jaitley, however, said that all banks had unanimously expressed the hope that greater transmission of lower rates could be seen over a period of 2-3 months.

The finance minister also expressed concern over the modest growth of domestic credit by PSBs at seven per cent the previous year. He, however, said that agricultural credit grew by 17.33 per cent over the previous year, which came as a silver lining.

The finance minister urged bankers to achieve the target of 20 per cent growth in educational loans.

 Jaitley noted a growth of 16–18 per cent in the housing sector and asked PSBs to achieve a 30 per cent growth in priority sector housing loans, “which are intrinsically secure loans and which are required to provide a stimulus to overall growth”.