Will RBI rate cut reduce your EMIS? New rule to increase credit supply to shadow lenders
MONETARY POLICY Rate cut transmission may be delayed given slow build up in deposits
MUMBAI: Your equated monthly instalments (EMIS) on home loan and car loan along with your deposit rates are likely to remain unchanged for now despite the first repo rate cut since August 2017.
Rate cut transmission is likely to be delayed given the slow incremental build up in deposits.
On Thursday, the Reserve Bank of India (RBI) increased repo rate, the rate at which the central bank lends to commercial banks, by 25 basis points (bps) to 6.25% from 6.50%.
One basis point is one-hundredth of a percentage point.
Along with the rate cut, the monetary policy committee (MPC) also decided to change the policy stance from calibrated tightening to neutral. The central bank decreased the rate considering the lower than expected retail inflation.
According to bankers and analysts, you are unlikely to see an impact on deposit and lending rates immediately.
“Transmission of cut in policy rates in banks’ lending rates may be incomplete and delayed given the slow incremental build-up in their deposits. It may be challenging for banks to push credit growth without fastpacing their deposit base, which may require hiking deposit rates and that may be difficult in a rate cut cycle,” said Anil Gupta, vice president and sector head, financial sector ratings, ICRA.
The decision of a change in interest rate of home loans and car loans will have to come from the asset liability committee of individual banks and hence bankers say it is too early to predict the next move.
“In the last five months, liquidity in the system has been tight and most banks have increased interest rates on deposit and MCLR (marginal cost of funds-based lending rate). With this cut, we need to see how the rates of deposits move. With the demand supply situation, the credit growth has been strong and better than deposit growth. The demand for credit is higher than deposit growth making it little difficult to reduce deposit rate. We will have to wait and see,” said Shanti Ekambaram, president, consumer banking, Kotak Mahindra Bank Ltd.
Only if deposit rates are cut, will lending rate come down. “Both will go hand in hand. If deposit rates are cut then possibly there will be room for cut in MCLR because the computation of lending rate is totally a function of the rates offered to the savers. Credit growth after a long time has been sustainably higher at 15% which you need to match with deposit growth. How will you mobilize deposits with a cut is a big question. First there has to be a deposit rate cut followed by a cut in lending rates,” said Ashutosh Khajuria, executive director and chief financial officer at Federal Bank Ltd.
Though you may not see an immediate impact on your lending and deposit rate, a hint on lower interest rate cycle from RBI governor Shaktikanta Das indicates that their interest rate may come down in the second half of the year.
According to Radhika Rao, economist, DBS Group Research, the RBI governor’s remarks that “there is room to cut” suggests this is not a one and done easing.
“A sharp revision in the inflation outlook and limited spillover seen from a slippage in fiscal targets, paves the way for a shallow rate-cut cycle,” said Rao. MUMBAI: In a move to improve liquidity flow to non-banking financial companies (NBFCS) in the country, the Reserve Bank of India (RBI) on Thursday announced that banks assign differential risk-weights to their exposures to NBFCS, based on ratings assigned by credit rating agencies, as against the existing practice of a uniform risk weight of 100%.
Prevailing regulations require uniform 100% risk weights on bank exposure to rated, as well as unrated, systemically important NBFCS that don’t take deposits. The move will not only free up capital for banks for further lending—both directly and indirectly—but will also help reduce borrowing costs for well-rated NBFCS, which have been grappling with a systemic liquidity crisis triggered by a series of defaults by Infrastructure Lease and Financial Services Ltd (IL&FS), and its subsidiaries.
The alignment of risk weights with credit ratings will “facilitate credit flow to better-rated NBFCS, lower the cost of bank borrowings for NBFCS and for the end users, particularly the borrowers of micro finance institutions,” RBI governor Shaktikanta Das said, while addressing the press.
“PSU banks have been keen to lend to highly rated housing finance companies and asset finance companies due to the benefit of lower risk weights, but were not too keen to lend to even highly-rated loan companies due to 100% risk weight,” said Renu Sud Karnad, managing director, HDFC Ltd. The relaxation will also make banks more amenable to lend to NBFCS.
While it is not clear yet if the new guidelines will become applicable retrospectively as well, or fresh loans alone, the move is likely to free up around ₹15,000 crore worth of capital for banks, said Karthik Srinivasan, group head, financial sector ratings, Icra Ltd. “In a way this (alignment of risk weights with credit ratings for NBFCS) is indirect capitalization of banks.”
Guidelines pertaining to risk weights for bank exposures to NBFCS will be released by the end of February. The central bank also clarified that the risk weight for core investment companies will continue to remain 100%.
“So far, banks were given flexibility to assign risk weights for only a few categories of NBFCS, such as asset finance companies and housing finance companies. In my view, this needed correction. A firm financing SMES is as important as a firm financing cars, as both are critical to growth. The move to bring all NBFCS and corporates at par, in terms of how risk weights are assigned, is a huge positive,” said Sumit Bali, chief executive, IIFL Finance.
Bali added that the flexibility provided will also allow banks to improve their return on capital and pass on the benefits to borrowers as lesser capital will have to be set aside against the loans to NBFCS.
Although bank lending to NBFCS during the first half of 2018 remained robust, the IL&FS crisis in September dried up bank lending, forcing NBFCS to scout for alternate sources of funding, like non-convertible debentures.
The central bank which announced its last monetary policy statement for the current financial year also said that it will be merging three categories of non-banking financial companies —asset finance companies, loan companies and investment companies—into a single category, namely NBFC investment and credit company, in line with its efforts to harmonize various classes of NBFCS, and the regulations for the sector on the whole.
ALONG WITH THE RATE CUT, THE MONETARY POLICY COMMITTEE
ALSO DECIDED TO CHANGE POLICY STANCE FROM CALIBRATED TIGHTENING TO NEUTRAL