Rajan Talks Tough .... Banks Reduce Lending Rates

HDFC Bank, ICICI Bank, State Bank of India cut lending rates after RBI Guv Raghuram Rajan’s tough talk

 

Three leading banks of the country cut their lending rates on Tuesday, hours after Reserve Bank Governor Raghuram Rajan dismissed the argument of banks that their marginal cost of funds had not fallen despite two rate cuts by the central bank in the last four months as “nonsense”.

On a day when the RBI left its key policy rates unchanged and banks appeared reluctant to lower rates saying that their cost of funds had not fallen, it was some tough talking by Rajan which seemed to goad banks into action.

By the second half of the day, State Bank of India and HDFC Bank slashed their base rates or the rate below which they cannot lend by 15 basis points each to 9.85 per cent while ICICI Bank cut rates by 25 basis points to 9.75 per cent. Indian industry as well as the government, too, have been batting for lower interest rates saying that the high cost of capital was a deterrent.

EMIs on home, auto and personal loans are now expected to fall. SBI last cut the base rate by 5 bps to 9.70 per cent in January 2013.

Earlier, while nudging banks to cut rates, Rajan said comfortable liquidity conditions should enable banks to transmit the recent reductions in the policy rate into their lending rates, thereby helping boost financing for productive sectors of the economy. The RBI had cut  the repo rate by 50 basis points in two stages — 25 bps each on January 15 and March 4 — to 7.50 per cent.

“I do see an environment where credit growth is tepid, banks are sitting on money and their marginal cost of funding has fallen … the notion that it hasn’t fallen is nonsense, it has fallen,” Rajan said. It is not often that the RBI is seen to be nudging banks, lest it be criticised for micro managing banks. But the reluctance of banks over a period to slash rates despite the central bank cutting rates twice this year appear to have forced its hand.

“With little transmission, and the possibility that incoming data will provide more clarity on the balance of risks on inflation, the Reserve Bank will maintain status quo in its monetary policy stance in this review,” Rajan said.

Over the last few months, the central bank as well as economists and analysts have been worried about the delay in monetary policy transmission.

The essential point is that the policy works with a lag and any delay by banks in lowering rates is bound to further impact negatively businesses and loan growth. According to a  recent IMF analysis, it takes 13 months on an average for pass-through from a change in the RBI’s policy rate to the interbank rate. After that it takes over nine months for a change in deposit rates for customers and a much longer period of close to 19 months when it comes to lending rates.

Earlier in the day, defending the delay in transmission, SBI chairman Arundhati Bhattacharya said, “It takes a little time for things to pass through … The pass through is also determined by the amount of liquidity, the amount of credit demand and competition which also drives rates up or down. There are very many factors and repo is only one of the factors.” “When the RBI hiked rates by 350 basis points, did banks raise EMIs by 350 bps?” Bhattacharya said.

According to Rajan, going forward, the accommodative stance of monetary policy will be maintained, but monetary policy actions will be conditioned by incoming data. “First, the RBI will await the transmission by banks of its front-loaded rate reductions in January and February into their lending rates. Second, developments in sectoral prices, especially those of food, will be monitored, as will the effects of recent weather disturbances and the likely strength of the monsoon, as the Reserve Bank stays vigilant to any threats to the disinflation that is underway,” he said.

“The Reserve Bank will watch for signs of normalisation of the US monetary policy, though it anticipates India is better buffered against likely volatility than in the past,” Rajan said.

RBI-effect: After HDFC Bank, SBI, ICICI Bank slash interest rates, more banks to follow

Bankers on Tuesday said interest rates are expected to come down as the past rate cuts by the Reserve Bank of India (RBI) will lead to a decline in cost of funds for banks – HDFC Bank, State Bank of India (SBI), by 15 bps each, and ICICI Bank, by 25 bps, have already cut interest rates in the wake of Governor Raghuram Rajan laying the blame squarely on banks for RBI keeping repo rate and CRR unchanged in the latest monetary policy review.

“Interest rates can be expected to come down as the policy measures already taken reflect in banks’ cost of funding,” said ICICI Bank MD Chanda Kochchar.

Reacting to Governor Raghuram Rajan‘s status quoist policy, VR Iyer, chairperson & managing director, Bank of India, the impact of reduction in cost of deposit experienced during the last quarter will encourage banks to pass on the benefit to customers. “Retail borrowers may see lower EMIs,” she said.

TM Bhasin, chairman, Indian Banks’ Association, said, “After front loading two repo rate cuts in quick successions, the RBI has taken a pause to assess the effects of its action in the economy in general and banking sector in particular.  To nudge banks to effectively transmit monetary policy signals, a pitch is made to move over to marginal cost for base rate computation.”

“To encourage banks to reduce base rates the RBI will issue guidelines on the use of marginal cost of deposit in the base rate calculations. The impact of reduction in cost of deposit experienced during the last quarter will encourage banks to pass on the benefit to customers. Retail borrowers may see lower EMIs,” Iyer said.

According to a DBS Bank official, benefits of easier monetary policy have yet to reach the real economy.

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