Express news service
For most existing bank borrowers, the current ultra-low interest rate regime is like a free uneaten lunch. Indeed, even though the RBI has cut the policy rate by 250bp since February 2019, interest rates on outstanding loans have fallen by just around 100bp.
Officials say transmission is slow because most loans, including variable rate loans, have a reset period of one year and more, which delays transmission.
While the weighted average lending rates (WALR) for all scheduled commercial banks fell from 10.25% in March 2019 to 9.10% in June 2021, resulting in a reduction of 115bp, for public sector banks, the WALR fell 113 bps, while for private lenders it was 108 basis points.
In August, RBI Governor Shaktikanta Das noted that cuts in repo rates have reduced corporate and household debt, but in reality, there is ample room for even lower IMEs.
Since banks took more than two years to cut rates by around 100 basis points on outstanding loans, they might as well take a few more quarters to pass on repo rate cuts from 115 to 130. basis points (out of 250 basis points) to customers.
The question is whether RBI will maintain its accommodative stance for so long.
In contrast, bank deposit rates have fallen rapidly and sharply, providing negative returns to savers. But unlike deposits, which are at fixed rates, over 75% of outstanding loans are at floating rates, which by nature should facilitate monetary transmission.
However, pass-through to lending rates is hampered due to the long maturity profile of long-term deposits.
Up to 76% of variable rate MCLR loans are linked to MCLRs of one year and more and are reset each year, while about 16% are linked to MCLRs with a term of 3 months.
In October 2019, banks tied all new floating rate loans to the external benchmark, but these loans are only a fraction so far.
Pass-through to outstanding rupee loans has often been difficult.
For example, when the RBI increased the repo rate by 50 basis points between June and August 2018 and reduced it from February 2019, the WALR on outstanding rupee loans continued to increase until ‘in July 2019, even after the start of the six-month easing cycle.
This means that borrowers who took out 10-year variable rate loans compared to the 1-year MCLR with an annual reset period between February and July 2018, saw their borrowing costs increase (when loan rates were lower. reset after one year, i.e. February-July 2019 rate), unlike new rupee loans, the rates of which fell from March 2019.
Currently, rates on new loans have fallen 215 basis points and although borrowing costs have eased, incremental credit growth is single-digit 5-6%.
The biggest setback is credit to large industries, which decelerated 4.9% in the first half of FY22.
A year earlier, the drop was 5.1%, indicating that nothing has changed much when it comes to high priced loans.
Credit to large companies is an important marker, as it represents 80% of total credit to industry.
Likewise, within services, NBFCs which represent 34% of share in services, and commercial real estate with a share of 9.9% decelerated from 6.5% and 3.2% respectively in the first half of the year. the FY22.
Unfortunately, the decline is more marked than that observed during the pandemic year, when it fell by 4 and 1.7% respectively.