Govt to Lean on PSU Banks for Rate Cut

Banks are re­luc­tant to pass on full ben­e­fit of lower RBI pol­icy rate that is needed to shore up eco­nomic growth

The Economic Times - - Economy -

Dheeraj Ti­wari & Vi­nay Pandey

New Delhi: The gov­ern­ment will lean on state-run banks that are re­luc­tant to pass on the full ef­fect of mea­sures taken by Re­serve Bank of In­dia (RBI) in the form of rate cuts that are badly needed to shore up growth.

Af­ter RBI low­ered the pol­icy rate by 25 ba­sis points and took a range of mea­sures to en­hance liq­uid­ity, the gov­ern­ment feels banks have lit­tle ex­cuse not to pass on ben­e­fits to con­sumers. One ba­sis point is 0.01 per­cent­age point. “We would want the banks to re­duce rates lat­est by May 1. We will ex­ert pres­sure on banks to do so,” a top gov­ern­ment of­fi­cial told ET. Some banks had cut rates marginally af­ter the new mar­ginal cost of funds based lend­ing rate (MCLR) regime was rolled out at the start of the month, but the gov­ern­ment feels there is room for much more. “The banks will per­haps need to do some more of trans­mis­sion of the re­duc­tion in pol­icy rates by RBI,” eco­nomic af­fairs sec­re­tary Shak­tikanta Das had said af­ter RBI cut the repo rate on Tues­day.

Be­fore that, the gov­ern­ment had done its bit by cut­ting the small sav­ings rate sharply. This ad­dressed the con­cern of banks that they are un­able to cut de­posit rates be­cause of the high rate of re­turns of­fered on small sav­ings.

Ahead of the lat­est cut, RBI had low­ered the repo rate, the key pol­icy rate, by a cu­mu­la­tive 125 ba­sis points since Jan­uary 2015.

The re­sponse of the banks, or mone­tary pol­icy trans­mis­sion, has been far less en­thu­si­as­tic. Me­dian term de­posit rates fell only 80 ba­sis points over the pe­riod while the floor lend­ing rate, or base rate, de­clined even less — 60 ba­sis points.

In its mone­tary pol­icy state­ment on April 5, RBI high­lighted the need for greater trans­mis­sion.

“Per­haps more im­por­tant at this junc­ture is to en­sure that cur­rent and past pol­icy rate cuts trans­mit to lend­ing rates,” it said, hop­ing that the in­tro­duc­tion of MCLR should im­prove trans­mis­sion and mag­nify the ef­fects of the cur­rent pol­icy rate cut.

Another se­nior gov­ern­ment of­fi­cial told ET that the con­struc­tion sec­tor’s re­vival is cru­cial to the econ­omy pick­ing up pace.

A low­er­ing of lend­ing rates just be­fore the Sev­enth Cen­tral Pay Com­mis­sion award boosts salaries can help trig­ger hous­ing de­mand, he said, ex­plain­ing the ur­gency. Apart from this, lower rates could also help re­vive pri­vate in­vest­ment. RBI ex­pects the econ­omy to grow 7.6% in the cur­rent fis­cal, same as the last one. Some banks had cut rates as the MCLR de­buted. They want to see a de­cline in de­posit costs be­fore tak­ing a call on lend­ing rate cuts.

The liq­uid­ity mea­sures will take about a month to have an ef­fect.

Gov­ern­ment Wants More

“Any trans­mis­sion of rate cut an­nounced by RBI comes with a lag which will also be based on the mar­ginal cost of de­posit un­der the new regime,” the man­ag­ing di­rec­tor of a bank said, adding that lenders are aware of the gov­ern­ment's sen­si­tiv­ity on rates. “The cut in rates of small sav­ing schemes has been just an­nounced, so hope­fully new de­posits will be raised on lower cost thus giv­ing us the lee­way to cut rates.”

In­de­pen­dent ex­perts reckon con- De­posits growth has fallen sharply Liq­uid­ity mea­sures will take some times to take ef­fect

Some banks had cut rates marginally af­ter the new MCLR regime was rolled out this mth, but the govt feels there is room for more

di­tions have im­proved for mone­tary trans­mis­sion.

Liq­uid­ity mea­sures are likely to re­move a key im­ped­i­ment to bet­ter mone­tary trans­mis­sion, said Pran­jul Bhan­dari, chief In­dia econ­o­mist at HSBC.

“Along­side, re­duc­tion in the small sav­ings rate and in­tro­duc­tion of the mar­ginal cost of funds based lend­ing rate (MCLR) are likely to im­prove trans­mis­sion,” Bhan­dari said in a note af­ter the pol­icy was an­nounced.

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