BanksMayNotbeinHurry to Lower Lending Rates
Mumbai: Banks led by the State Bank of India would follow the Reserve Bank of India in lowering interest rates, but they may not be in a hurry since they just did so when they shifted to a marginal cost based formula.
Deposit rates may have to fall further before the lenders, saddled with huge bad loans, reduce their lending rates. “Banks’ market borrowings are low, so deposit rates will need to come off further for meaningful transmission,” said Arundhati Bhattacharya, chairman, State Bank of India. RBI governor Raghuram Rajan, who cut policy rate by 25 basis points on Tuesday, said the lending rates - under the new system MCLR – have fallen by 25 basis points. This he said that was based on the MCLR rate announced by 26 largest banks which account for 83% of the market share.
“This is important because it means an actual rate cut to the borrower of 25 to 50 bps even before today’s rate cut. Put differently policy action is significantly greater today than just another 25 bps rate cut. Borrowing is now significantly cheaper and it will continue to get so,” said Rajan.
The State Bank of India, which has one-fifth of the market share, offers homeloanat9.40%undertheMCLR system against 9.50% under the base rate system.
Speaking to ET, Rakesh Sharma, MD of Canara Bank, said that he expected lending and deposit rates to come down further in the next three months. “Due to MCLR, transmission of policy will be faster. This is because the reduction in the rate will be applicable only for the new borrowers unlike in base rate system when the banks had to reduce rates for all borrowers,” said Sharma.
The fact that there will be a time lag is unanimous. Melwyn Rego, MD of Bank of India, said, “Repo rate cut will result in softening of MCLR with a shorter time lag as compared to the base rate methodology.”
“As MCLR finds its way in the next two months, we will have more rate cuts. Don’t look at it as a 25 basis points cut but composite of a rate cut when it all adds up. Borrowing rates are coming down significantly in this economy,” said Rajan