RBI to announce facility for NRIs to exchange old notes
The Reserve Bank of India (RBI) on Saturday said that it will introduce a facility for exchange of old specified…
Easing of liquidity by the Reserve Bank of India (RBI) may not translate into a significant cut in lending rates immediately or in near future. Economists say it may take a few more months for the banks to pass on the benefit to borrowers.
The RBI on Wednesday allowed banks to retain excess liquidity by scrapping the Cash Reserve Ratio (CRR) requirement of 100 per cent for banks. With this, all eyes are on the banks to reduce the borrowing rates. But economists and analysts say it is not going to happen anytime soon. The banks will wait to gauge the situation before they cut their lending rates. “We hope that the liquidity conditions would prevail which would permit banks to cut rates,” says Saugata Bhattacharya, chief economist in the Axis Bank.
After Prime Minister Narendra Modi announced the decision to scrap all the high value currency on November 8, the country has been waiting for home loan rates to fall. According to Prof Pronab Sen, former Advisor in the erstwhile Planning Commission, it will take at least six months for the currency to be fully replaced. “The banks should be able to start credit flow four months after that, provided the withdrawal limits are not done away with,” he adds.
Like Axis Bank, HDFC Bank is also of the opinion that there’s a case for dropping lending rates. “The banks may wait for a month to see what are the withdrawals like,” says Abheek Barua, chief economist in the HDFC Bank. “Though the conditions like easy liquidity, low cost of funds and slow credit demand are are allright, banks will have to figure out when to do it considering we are in an uncertain time. There will certainly be pressure to reduce marginal cost of funds based lending rate (MCLR),” says Barua.
All bank loans, including home loans, taken after April 1, 2016, are now linked to the bank’s MCLR. And with the bond yields inching up, the case for dropping interest rates becomes even stronger. However, many feel the banks might want to wait for the RBI’s next policy review given that its tone was hawkish and it might maintain status quo in February.
Banks are being seen as the biggest beneficiaries of the demonetisation decision as they are flushed with money as deposits touch around Rs.12 lakh crore. The Prime Minister announced that the banks would soon give loans at cheaper rates having received huge deposits.
However, in the past one month after the demonetisation decision, lending rates have fallen only marginally as compared to the steep cuts in deposit rates. Canara Bank and Bank of Baroda, have lowered their lending rates by 0.15 per cent to 0.2 per cent. On the other hand, deposit rates have fallen between 1-2 per cent in the same period.
Even as the banks say they expect rates to be cut down going forward, analysts say the banks which have been hit by increasing non-performing assets (NPAs) would like to see how much damage has been done to the existing borrowers.
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