Banks are silent on passing on rate-cut benefit and dash hope of common man & bizmen equally

At the new RBI governor Shaktikanta Das’ first policy meeting, the monetary policy committee (MPC) surprised by voting 4-2 in favour of cutting the repo rate by 25 bps to 6.25%, as against expectations of no change, while simultaneously changing its stance to ‘neutral’ from ‘calibrated tightening’ thus far.

However, Rather than passing on the benefit of policy rate reduction to the consumers, the banks have rather maintained a stony silence on the crucial issue. It is surprising as it goes against the normal trend of passing on the benefit to the consumer.

Reviewing the annual monetary policy in Mumbai on February 7, the bureaucrat-turned-governor stated that the change in stance “provides flexibility to address, and the room to address, sustained growth of India’s economy over the coming months as long as inflation remains benign”.

The only issue that none of the bank has come forward, announcing that it has lowered its lending rate, which was quite surprising.

In fact, a section of the bankers is of the view that the banks will be comfortable in bringing down their interest rate only when the RBI goes for next round of policy rate cut in the medium term.

Normally, State Bank of India is the first to take such actions by cutting its lending rate, which is followed suit by all other banks. But, SBI is mum on the crucial issue as of now.

Before taking a call in the lending rate-cut, the banks’ asset liability match committee meet internally to take a stock of the situation. After getting a green nod from the committee, the banks first reduce their deposit rate which finally paves the way for coming down of lending rate.

These days, the lending rates are decided on the basis of marginal cost–based lending rate, base rate and the spread of the bank concerned. Less lending rate will simply mean that you will have to pay smaller amount to your bank in the form of equated monthly instalment (EMI).

One more thing is to be noted here. As usual, it is the government at the Centre which is the first to raise voice for slashing the rate by banks the moment the RBI reduces its policy rates. However, this is not the case this time.

The only rhetoric reaction came from the economic affairs secretary Subhash Chandra Garg who welcomed the RBI move by saying that the assessment of the MPC for growth and inflation outlook to be in consistence with the government’s assessment of inflation and growth; The Government welcomes the assessment of the MPC and its decision to reduce the Policy Rate and change of Monetary Policy stance, he added.

Hope is the only way which is being seen from every sector that banks will cut down their lending rates, sans commitment from the lenders. In fact, save for raising the limit of collateral free agriculture loan from Rs 1 lakh to Rs 1.60 lakh, there is virtually nothing which may come as a relief to the common man or farmers living in the remote areas of the country.

Real estate developers have pinned their hopes on banks that the lenders will bring down their lending rates as a result of reduction in repo rate by 25 bps.

The consequential reduction in EMI burden for the consumers should pep up the housing demand further. With inflation down to historic levels, Jaxay Shah, national president CREDAI said.

A Nomura study has expressed two concerns over the recent RBI policy review. It has raised question on the relevance of policy stance.

In India’s case, the RBI’s policy stance is a signal of the future policy path, but the RBI’s decision to move to a ‘calibrated tightening’ stance in October 2018 (after delivering 50 bps cumulative hikes), retaining this stance in December 2018 (by when oil and food prices had stayed low for some time) and following up with a rate cut in February 2019, dilutes the importance of this tool, it says.

Dinabandhu Mohapatra, MD & CEO, Bank of India, says that RBI has reiterated its commitment to manage inflation at 4% level, while supporting growth. Still, he indicated that strong-rated NBFCs will be able to raise more funds at competitive price for a simple reason that RBI has reduced risk weight for rated exposure on NBFCs-ND-SIs from existing 100% to risk weights based on their respective external ratings, in manner similar to that for corporates.

RBI has also raised the limit of collateral free agriculture loan from Rs.1 lakh to Rs.1.60 lakh. This will enhance coverage of small & marginal farmers in formal banking system and will help in growth of agricultural activities and agrarian economy, Mohapatra said.

The situation is such that the banks and other lenders who had been feeling happy to know about raising the income tax waiver limit from Rs 2.5 lakh per annum to Rs 5 lakh have ended up that in absence of any sop coming in the form of reduced lending rate, people may think twice before knocking their doors for loans.