While the Reserve Bank of India (RBI) has slashed policy rate by 110 basis points since February this year, banks were unable to fully pass on the benefit of the rate cuts due to tight liquidity conditions.
Interest rates on retail loans including home and auto are set to ease further as the government has asked banks to launch a range of repo rate-linked products. The move will ensure faster transmission of policy rate cuts to end-borrowers. Working capital loans to the industry are also likely to get cheaper, Finance Minister Nirmala Sitharaman said while announcing measures to boost the economy.
While the Reserve Bank of India (RBI) has slashed policy rate by 110 basis points since February this year, banks were unable to fully pass on the benefit of the rate cuts due to tight liquidity conditions. However, even with liquidity now in surplus mode, bank lending rates continue to remain sticky.
A number of banks-both public and private, announced a reduction in marginal cost-based lending rate (MCLR) by 5-25 basis points this month, in response to RBI's rate cut of 35 basis points in the August policy review. This prompted the government and the RBI to push banks towards the new method of linking their lending rates to an external benchmark. The RBI's repo rate will serve as an external benchmark for interest rates of loans products that banks are expected to launch soon.
The RBI released a report on external benchmarking more than a year ago but hadn't made it mandatory for banks yet. State Bank of India (SBI), the country's largest lender, was the first to voluntarily link some of its lending rates to RBI's repo rate in May 2019. Also, SBI Chairman Rajnish Kumar said that the bank will link more loan products with repo rate for new customers depending upon their liability behaviour.
Last week, other lenders, especially state-owned, announced similar plans too. Union Bank of India announced repo rate-linked lending rate (RLLR) home and auto loans on August 23.
"With the introduction of repo-linked home loans, home loans of above Rs 30 lacs to Rs 75 lacs will now be available at an attractive interest rate of 8.25 percent for borrowers with a good credit score. Thus, the home loan linked to repo rate provides 35 bps benefits over the existing home loan," Union Bank of India said in a statement.
Private banks, on the other hand, are yet to take any action on external benchmarking. Earlier this week, a senior official of Axis Bank said there were other ways to lower the lending rates.
"It is not necessary to use only external benchmarks, there are multiple avenues such that we are able to meet the requirement that the RBI wants. Given the fact that the underlying liquidity is very easy, the ability of banks now to be able to pass on, what you will now find that...even with the MCLR environment, transmission will certainly be much faster than what you've seen so far," Rajiv Anand, Executive Director, Axis Bank said.His comments come on the day when RBI Governor Shaktikanta Das said that the central bank expects lenders to take the initiative on external benchmarking and speed up the process to support economic growth. Das also indicated that the regulator may formalise the arrangement for better transmission.