Forget Transmission, Some Banks Have Raised Lending Rates Since Last Repo Cut

Radhika Merwin In recent weeks, there has been a growing clamour for rate cuts by the RBI. Low inflation reading and disappointing GDP growth numbers for the March 2019 quarter have strengthened the case for sharper rate cuts.

But even if the RBI does deliver, will banks pass on the policy rate cuts to borrowers? Maybe not. If banks’ actions in recent months are any indication, lending rates may not come down in a hurry.

Since January, while the RBI has reduced the policy repo rate by 50 bps, banks have lowered lending rates (marginal cost of funds based lending rate, or MCLR) by just 5-10 bps. But what is more baffling is the fact that a few — such as Canara Bank, Bank of India (BoI) and Bank of Baroda — have actually increased their lending rates since the RBI’s rate cut in April.

What gives

Under the MCLR, banks have to compute their cost of funds based on the latest rates offered on deposits or borrowings. Hence, unless there is a reduction in the cost of funds, the lending rates cannot move lower.

Persisting tight liquidity has provided banks with lesser leeway to reduce deposit rates.

Since January, deposit rate cuts have been few and that too only in select banks and tenures. With little respite on the cost front, banks have not been able to cut lending rates meaningfully. A few banks have increased deposit rates in certain buckets.

After lowering its one-year MCLR by 10 bps in March, BoI increased its benchmark lending rate by 5 bps in May to 8.7 per cent. In response to an email query, it said: “The decision to increase the MCLR in the one-year bracket by 5 bps was taken mainly due to increased marginal cost of funds and operating costs during the period.”

Aside from marginal cost of funds, operating costs (associated with providing the loan) is one of the other components included to compute the MCLR.

More than cuts

High currency in circulation and credit deposit ratio could continue to impede transmission. Currency in circulation has increased by 17 per cent in FY19. Credit deposit ratio is high at 77-78 per cent, implying that banks are able to deploy ₹77-78 out of every ₹100 in deposit as loans. This indicates pressure on their resources.

The RBI will have to continue with its open market operations (buying of government bonds) to infuse liquidity. A cut in CRR (cash reserve ratio) will be hugely welcome.