Lending rates are yet to see any meaningful easing despite policy rate cuts and liquidity surplus in the system. While some banks have decided to link some of their interest rates to the external benchmark, Reserve Bank of India (RBI) Governor Shaktikanta Das said he expects other lenders to take initiative and speed-up the process for better transmission of lower rates to push growth.
"It started with State Bank of India (SBI) and now other banks are also doing it. They have linked new loans to the external benchmark to the repo rate. I expect more initiatives and this process to get faster. Time may come, I think, perhaps we need to formalize this arrangement," said Das.
The central bank cut policy rates by a cumulative 75 basis points between February-June 2019. In the policy review meeting earlier this month, Das said banks had passed on only 29 basis points in the same period. However, RBI had not made external benchmarking mandatory as banks were dealing with bad loans deposit and growth rate was tepid.
Das said banks have responded positively to linking interest rates to external benchmark but the process needs to be faster. The move will bring relief to borrowers of home and auto loans as any change in the policy rate will immediately get transmitted. This is expected to boost credit growth.
Das also emphasized that supporting growth was the highest priority for the central bank. He also talked about how soundness of the banking system has a bearing on financial stability. "Even if individual institutions are robust, the overall behaviour of the financial sector can pose a systemic risk. Hence, monitoring the health of the banking sector is crucial for financial stability," he said.
Das also said the RBI was keeping a close watch on the inter-connectedness of banks and non-banking finance companies (NBFCs). Das said the Working Group on Core Investment Companies (CICs) has already started its deliberations. He said RBI will carry out necessary changes in the regulatory architecture for CICs based on the report of the working group.
While there was no formal proposal to carry out an Asset Quality Review as of now, Das said RBI was monitoring about 50 NBFCs and housing finance companies. This included monitoring their capital adequacy, stability, cash flows. "It is our endeavour that NBFC sector functions in a robust and resilient manner. The NBFC sector has an important development role to play but it should also be stable," Das said.
Das also highlighted the importance of strengthening corporate governance structure in public sector banks (PSBs) on an immediate basis. It includes the efficiency of boards, audit and risk management, monitoring performance of managing director and chief executive officers.
"We have already sent our suggestions to the government for governance reforms in PSBs," he said.
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