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Last Updated Tuesday July 25 2017 02:14 AM IST
Other Stories in Analysis

Lending rates won't fall quickly

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RBI

Kochi: The current interest rate on bank loans might remain for at least four months. Though they are not willing to say it openly, bankers hint that borrowers must expect lower rates only by the next financial year. They complain that the Reserve Bank of India (RBI), which is urging commercial banks to reduce rates, is not being realistic.

Since January, the RBI has reduced the repo rate, at which it gives short-term loans to commercial banks, by 1.25 per cent points in four tranches. The RBI is unhappy that banks are not willing to transfer this relief to customers at the same rate. At the latest monetary policy review, RBI governor Raghuram Rajan had expressed unhappiness with the stand taken by banks. When the repo rate fell by 1.25 per cent points, banks reduced their base lending rate by a maximum of only 0.70 per cent point.

Bankers say that it is not the first time that they are unable to reduce lending rates in sync with repo rate. Between September 2008 and September 2009, repo rate was reduced by 4.25 per cent points. However, lending rates of banks fell by only 1.20 per cent points. Similarly, when repo rate fell by 1.25 per cent points between March 2012 and June 2013, banks gave customers only 0.25 per cent point relief in lending rates. Compared to this, bankers argue that that relief given by banks now is not inadequate.

Another argument is that banks use repo facility only for a small share of their monetary needs. They claim that they rely mostly on deposits.

Arundhati Bhattacharya, the chairperson of State Bank of India (SBI), the biggest public sector lender, has said that the relevance of repo rate is very limited in Indian circumstances. She says 97 per cent of SBI’s liability is related to deposits, and the relief in repo rate does not influence the cost of garnering money. She reminds that when the RBI raised repo rate by 3 per cent points in 2013, banks did not raise lending rates that much.

Another argument that bankers raise is that, in the current situation, when the ratio of bad loans is increasing, reducing lending rates will affect profitability.

The general belief is that the Federal Open Market Committee of the Federal Reserve, the US central bank, which determines monetary policy, will decide to raise interest rates this month itself. The impact of that increase in developing countries like India will be great. The RBI too will have to take steps to face the crisis. Banks ask why they should prepare to reduce rates without knowing what those measures would be.

A uniform method to determine lending rates of banks is expected to come into effect on April 1, 2016. This too negates the relevance of reducing rates for the time being.

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