Reserve Bank of India Governor Raghuram Rajan has asked banks to cut lending rates to prevent debt markets from eating into their business.
“…The longer you (banks) stay with your current lending rates, the more the markets are eating your lunch because more and more large corporations are borrowing from the market, issuing commercial paper rather than borrowing from the banks,” Rajan said during a question and answer session after the fourth CK Prahalad Memorial Lecture, organised by CII.
In the last couple of bi-monthly policy statements, the RBI had indicated that the accommodative stance of monetary policy will be maintained.
However, monetary policy actions will be conditioned, among others, by fuller transmission by banks of the Reserve Bank’s front-loaded rate reductions and consumer price inflation coming down.
The Governor said, “This will go on for some time. But eventually they (banks) will have to make a choice. The other point is they are waiting for credit to pick up so that the loss on the margins that they are making is made up by the volumes of the new loans that they will make. I think it is a matter of time before they pass it (lending rate cuts) on.”
Rajan observed that there is tremendous pressure on banks from different sides on their profitability. “So, one has to have a little bit of sympathy with them. But the fast moving banks and the markets are putting pressure. So, transmission will take place,” he said.
Since the first rate cut in January, the median base lending rates of banks has fallen around 30 basis points, a fraction of the 75 basis points in rate cut so far.
Loan demand In the third bi-monthly monetary policy statement, the RBI said as loan demand picks up in the October-December period of 2015-16, banks will see more gains from cutting rates to secure new lending, and more transmission will take place.
The announcement by the Government of capital infusion into public sector banks will help in loan growth, it added.