Large section of bank loan borrowers yet to gain from RBI rate cuts
Despite the RBI's 50 bps repo rate cut and liquidity infusion, a significant portion of borrowers haven't benefited due to reliance on MCLR-linked loans. MCLR remained unchanged at 9% in April, particularly affecting public sector borrowers. Banks' deposit costs and competition for funds are hindering faster transmission of rate cuts, impacting net interest margins.
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A large section of bank loan borrowers is yet to see the benefit from the Reserve Bank of India's two consecutive policy rate cuts.Data released by the RBI Wednesday showed that one-year median marginal cost of fund-based lending rate (MCLR) remained unchanged at 9% in April. MCLR has been at 9% since November, except February when it rose to 9.05%, the data showed.The central bank has reduced policy repo rate by a total of 50 basis points since February. It has also infused liquidity to the tune of Rs6.5 lakh crore in the banking system to ensure effective transmission of policy rate cuts into both lending and deposit rate.The latest RBI data showed that sections of existing borrowers may not have benefited in the form of reduction in their EMIs. This is because nearly 36% of all floating rate loans are priced on MCLR, while over 60% are on external benchmarks (EBLR) like repo rate. In the case of the public sector, the share of MCLR loans is at 51%, while it is just 13% for private banks.The weighted average lending rate (WALR) on fresh rupee loans as well as outstanding loans of banks fell month-on-month by 5 bps and 3 bps, respectively, to 9.35% and 9.77% in March, the data showed.WALR reflects loans priced to external benchmarks as well as those linked to banks' marginal cost of funds.The transmission of regulatory rate cuts happens quickly in case of repo-linked benchmark rate. The transmission in case of MCLR-linked rates, which depend on banks' deposit costs, takes a longer time of at least two quarters for the effect to play out, industry executives said.Data released Wednesday by the RBI showed that the weighted average domestic term deposit rate on fresh deposits of banks rose to 6.65% in March from 6.49% a month ago. On the outstanding deposits, the rate rose slightly to 7.03% from 7.02% in February.Analysts said that banking system liquidity was in deficit for a large part of March. This along with intense competition to raise liabilities, kept fixed deposit rates elevated.Liquidity conditions eased from late March, which in turn prompted banks to reduce rates on term deposits. A few large banks have also reduced savings deposit rates in a bid to protect their net interest margins (NIMs).According to CRISIL Ratings, the extent of reduction in NIMs will therefore depend on the ability of banks to manage their deposit costs. But given the competition for deposits seen of late, that ability will be curtailed.According to CRISIL Ratings, any reduction in term deposit (TD) rates will apply only to incremental deposits and renewals, resulting in a slower transmission of the reduction to the liability side. Data shows only ~21% of TDs are maturing in a year, which means the rest will be due for repricing only after this fiscal.
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