Even though Reserve Bank of India (RBI) is putting pressure on banks to transfer the recent repo rate cut benefit to customers, banking circles believe the general liquidity crunch is making it difficult to ensure full transmission.
RBI) governor Shaktikanta Das will be meeting bankers on Thursday in an attempt to ensure conversion of the recent rate cut into cheaper loans, media reports say.
The RBI slashed repo rate, the rate at which the central bank lends money to banks, by 25 basis point, to 6.25 percent, earlier this month responding to the subdued inflation figures and the need to add liquidity to push growth in a slowing global economy.
However, industry experts believe the current liquidity situation of the economy does not favour a viable reduction in the lending rate by banks. They point out the marked mismatch between credit growth and deposit growth. Credit growth has taken off to 9.3 percent, bank deposits have growth only by 6.1 percent, according to estimates. Tinkering with the interest rate on deposits will further affect the deposit growth and hamper banks' ability to extend more credit widening the marginal cost of lending rate (MCLR).
Aditya Puri, HDFC Bank CEO, has said that lending rates can't come down unless deposit rates brought down. "Banks are finding it difficult on the funding side," the Times of India quoted Puri as saying. "Transmission of RBI's rate cuts will depend on the time frame in which deposit rates go down. As long as there is a scarcity of deposits, and banks raise deposit rates, they cannot bring down lending rates."
Media reported in the last quarter that many banks increased deposit rates fearing a liquidity crunch in the system, pushing up their MCLR. Lenders are finding it difficult to mobilize deposits because of the rise in cash in circulation and mutual fund investments, Puri said. Falling bank interest rate will drive more investors to public provident fund (PPF) and post office deposits where the rates remain high.
Puri wants the RBI to bring down the statutory liquidity ratio (SLR) or cash reserve ratio (CRR) to bring down the cost of funds of banks without a reduction in deposit rates.
The RBI governor had told a press conference with Finance Minister Arun Jaitley in attendance that the "transmission of rates is very important, especially after the central bank announces a rate cut."
"As already stated in our post-Monetary Policy Committee press conference, I am having an interaction with the CEOs and MDs of the banks, both public and private sector, which is now scheduled to be on February 21," Das said. "We will discuss that issue with the banks and see what needs to be done."
The Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) government of Prime Minister Narendra Modi has been trying to infuse more liquidity into the economy to general more jobs in as it is facing the general election 2019 in a few months. Credit growth is a primary necessity to ensure that the system regains liquidity.