Millennium Post

Rajan raps bankers’ refusal to pass on interest cuts

Continuing to vent his anger over bankers’ reluctance to pass on benefits of lower interest rates and easy liquidity positions to borrowers, outgoing RBI Governor Raghuram Rajan on Tuesday said the central bank will soon revise the marginal cost of fund-based lending rate framework to help fasten up process of policy transmission.

Complaining that banks have passed benefits only in a “modest” measure to borrowers, Rajan said a pick-up in credit demand that shall follow the economic recovery and competition for corporate loans after the ongoing balance sheet clean-up by the state-run lenders, will ensure softer lending rates. 

Rajan charged bankers with inventing newer alibi for delaying the rate cuts and pointed out that concerns over the FCNR(B) redemptions, despite RBI’s public assurance of making it non-disruptive, are the latest one in a series. “Earlier, some bankers said it was lack of liquidity that was holding the rates high. 

Now, I hear from some that it is the fear of FCNR redemptions that is making them reluctant to cut rates. I have a suspicion that some new concern will crop up once FCNR redemptions are behind us,” Rajan said.

“We would be happier if there was more transmission,” he said, adding that the RBI is sensitive to “some of the difficulties” which banks have to face following the balance sheet clean-up. 

Rajan, who switched the stance of the monetary policy to be accommodative starting January 2015 and has effected rate cuts of 1.50 per cent till now, has been complaining for long about banks’ reluctance to pass on the cheaper money to borrowers. Rajan has also presented data suggesting banks have only passed on a third of the rate cuts so far. Added to the rate cuts are RBI actions on the liquidity front, which have created a condition where on some days, banks have parked their excess money with RBI using the reverse repo facility. 

To make transmission swifter, the RBI introduced the MCLR from April 1 this fiscal which has lowered the minimum cost of bank funding by up to 0.30 per cent. “Having examined our experience with the MCLR framework, we will shortly be suggesting some revisions,” Rajan said. 

He, however, noted that a “substantial pass through” of the rate cuts is possible only when the sagging corporate credit demand picks up on economic recovery. Competition between banks for this demand, which is possible when they have cleaned up their balance sheets, will force them to down their rates, he said. 

“Substantial pass through will happen only when corporate credit demand picks up and as public sector banks, strengthened by clean balance sheets, compete for corporate business,” he concluded. 

... But Bankers stay adamant, insist that ‘cheaper money is still some time away’
Mumbai: Ruling out any immediate transmission of rates despite RBI chief Raghuram Rajan blaming them of passing benefits “only modestly”, bankers on Tuesday said interest rates will fall once credit growth picks up. “We believe transmission of rates will happen gradually over the next few months as credit growth picks up pace,” SBI chairperson Arundhati Bhattacharya, said describing the status-quo monetary policy as per market expectations. 

She hailed Governor Rajan for frontloading liquidity provisions through an OMO as “a well thought-out move as capital flows have been relatively slow this year given the global uncertainties, resulting in lower net foreign exchange acquisition”.  During the customary post-policy press meet, Rajan blamed the bankers for holding onto higher rates even after the RBI lowering the same by 150 bps. 

Chanda Kochhar of ICICI Bank welcomed both the continued accommodative policy stance as well the measures to ensure adequate liquidity. That the move was welcomed by the market is clear from the fact that the fixed income market reacted immediately with the 10-year yields falling by about 5 bps, giving banks an opportunity to book profits on fixed income portfolios. Rana Kapoor of Yes Bank expects a rate cut in the coming months saying that notwithstanding the current pause on rates, the disinflationary impact will be upheld by favourable monsoons and structural policy reforms by government which will lead to a 50-100 bps space for incremental monetary easing during the current fiscal year itself.  

Kotak Mahindra Bank’s Shanti Ekambaram too echoed similar views, saying while risks of inflation remain, a host of positive factors like easy global liquidity and ample domestic liquidity indicate downward trajectory of interest rates in second half of the current fiscal year. With the system staring at an outflow of $26 billion in foreign currency deposits (FCNR-B), raised when the rupee was bleeding in September-November period of 2013 following the ‘taper tantrums’ in the summer of that year, Rajan sought to assuage concerns of the banking system saying RBI will ensure there is no market disruption because of it. 

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