The Reserve Bank of India (RBI) will meet the chiefs of public and private sector banks on Thursday to discuss transmission of policy rate cuts through cuts in the lending rates by the banks.

“Transmission of rates is very important, especially after the central bank announces a rate cut. It has already been stated in our post-MPC conference. I am having an interaction with the CEOs and MDs of banks, both public and private sector on February 21,” RBI Governor Shaktikanta Das said at a press conference here, after the customary post-Budget board meeting of the RBI, addressed by the Finance Minister Arun Jaitley.

Earlier this month, the Monetary Policy Committee (MPC) under the Chairmanship of the RBI Governor, decided to lower the repo rate (the rate at which the central bank lends money to the banks for a very short period) by 25 basis points or a quarter of a percentage. This cut, which was first made after August 2017, was expected to lower lending rates by banks. However, some of the banks have lowered their MCLR (Marginal Cost of Funds based Lending Rate, the benchmark for deciding lending rates by the banks) in the range of 5 to 10 basis points.

Banks say that money received on the basis of the repo rate is a small constituent of the overall liquidity. Also, any decision on lowering lending rates for borrowers depends on many other things such as the cost of overall liquidity, the overall fund situation and deposit growth, beside others. Keeping these in mind, the Asset-Liability Committee (ALCO) takes a call on revising the interest rate.

Still, there is feeling that transmission is not enough and this is not the first time such a complaint was being made. Even a few years back, RBI lowered the repo rate by 175 basis points over a period of time, though the actual rate cut by banks was not more than 60-70 basis points, except SBI, which lowered lending rates by over 1 per cent. Now, there is hope that post Thursday meeting.

More credit flow for MSMEs

Recent data shows that credit flow to micro, small and medium enterprises (MSME) has gone down. When asked what RBI could do to boost the flow, Das said it was up to the banks. “RBI recently announced a restructuring package for the MSME units up to 250 million rupees outstanding loans. All those cases are covered under the restructuring scheme. So now the ball lies in the court of the banks to restructure loans of eligible MSMEs,” he said.

Merger of Banks

After amalgamation of three banks, Bank of Baroda, Dena Bank and Vijaya Bank, there is lot of speculation of many more mergers. Finance Minister Jaitley also indicated that there was more in the offing. He said the experience really has been that of the SBI merger, and now the second one, which is taking place. “India needs fewer and mega banks, which are strong, because in every sense from borrowing rates to optimum utilisation, the economies of scale as far as banking sector is concerned are of great help,” he said.

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