RBI weighs linking some new bank loans to policy rate

The Reserve Bank of India (RBI) is looking to get banks to link some new loans to its key policy rate or other external benchmarks, Governor Shaktikanta Das said on Monday, as he pushes them to cut rates faster to stimulate a flagging economy. Since February, the RBI has cut the repo rate by 110 basis points (bps), but most Indian banks - which rely on an opaque rate-setting mechanism, have not come close to following suit.

The State Bank of India (SBI), the largest lender by assets, has cut its benchmark lending rate by 30 bps.

Commercial banks cite high deposit rates for their inability to cut loan ones. Marginal reductions restrict how much borrowers benefit from the repo cuts.

"Today, the economy requires a certain amount of push not just from the monetary policy but also from its transmission," Das said. "I think the time has now come to formalise this linking of new loans to external benchmarks like the repo rate." "We'd kept the external benchmarks in abeyance earlier because we wanted to see how the market evolves," the governor told a banking conference in Mumbai.

SBI, the largest lender by assets, earlier this year linked its savings bank deposits and short-term loans to the repo rate, becoming the first Indian bank to do so. "I expect more initiatives and this process to become faster," Das said, adding that the RBI has been in talks with banks ensure "faster and greater" adjustment of rates.

Das also said the central bank was in talks with non-bank housing finance companies (NBFCs) to ensure that none collapse amid a debt crisis in the sector that has contributed to a broader economic slowdown.

The RBI is closely monitoring the 50 biggest NBFCs and housing finance companies, including their capital adequacy, stability and cash flows, Das said.

The collapse of Infrastructure Leasing & Financial Services (IL&FS) late last year created contagion fears that hit many other Indian NBFCs and dented credit growth, which has severely stung the auto and real estate sectors.

However, Das said there was no proposal at the moment for any asset quality review for NBFCs.

The National Confederation of Bank Employees (NCBE) felt that there is also a need for a wider national debate on the entire banking policy involving all stakeholders Bank staff unions have welcomed the Ministry of Finance initiative to nudge public sector banks (PSBs) to launch an ideative and consultative process from lower levels to identify various issues and challenges.

The National Confederation of Bank Employees (NCBE) felt that there is also a need for a wider national debate on the entire banking policy involving all stakeholders in order to rebuild the nation.

Productive sectors and wealth generation should get focus over speculative activities, said A Raghavan, Joint Secretary, NCBE, and General Secretary, State Banks' Staff Union (Kerala Circle).

Agriculture and small and medium enterprises should get priority in the credit policy. The Jan Dhan scheme should be expanded to ease credit availability and ensure judicious distribution of the resources. As per data available, there are around six lakh villages in the country, and yet, the number of rural bank branches are diminishing, Raghavan noted.

A bank branch could be placed right at the centre of developmental effort at the village-level. Naturally, this would translate into higher employment in general, direct or indirect.

Another point that craves for focused attention is the policy on willful default. The Reserve Bank as well as major commercial banks such as State Bank of India have come out with policies in this regard. Demands have been aired from various sections, especially from bank employees' unions, for stringent action to address the menace that destroys the very edifice of banking in India.

The cases of willful defaults have increased in the recent years, especially during the last five years. This has been confirmed in the Lok Sabha by Finance Minister Nirmala Sitharaman herself.

The number of wilful defaults has increased from 5,349 to 8,582 during the period of 2014-19. The amount involved for the year 2018-19 alone comes to around Rs 1.5 lakh crore.