Flagging poor health of the banking sector as a matter of concern, the RBI said it will conduct a detailed study to assess whether this has impeded monetary transmission (of policy rate-cuts to lending rates).
In its latest annual report, the RBI said “…This (poor health) appears to have impacted monetary transmission as banks have either not responded adequately to cuts in the policy rate or did not cut their lending rates.”
The RBI reduced the policy repo rate (the interest rate at which banks borrow short-term funds from the RBI to overcome liquidity mismatches) by a cumulative 175 basis points (bps) during January 2015 to June 2017. In response, banks reduced their weighted average domestic term deposit rate (WADTDR) by 126 bps during January 2015 to October 2016.
The weighted average lending rate (WALR) on fresh rupee loans and outstanding rupee loans declined by 97 bps and 75 bps, respectively, during the same period. The reduction in the WADTDR was significantly higher than that in the lending rates, the RBI said.
Banks also lowered their median term deposit rate by 56 bps during November 2016 to June 2017. As a result, the WALR on fresh rupee loans declined by 98 bps, while the WALR on outstanding rupee loans declined by 42 bps (up to June 2017).
The largest reduction in MCLR post-demonetisation was effected by public sector banks, followed by private sector banks and foreign banks
Observing that the marginal cost of funds-based lending rate (MCLR) introduced in April 2016 has not performed as expected, the RBI said although the introduction of the MCLR resulted in better transparency on fixing of lending rates by banks vis-à-vis the base rate system, banks have frequently adjusted the spreads, thereby impeding transmission to the actual lending rates.
Hence, the central bank will conduct a detailed interdepartmental study to examine various aspects of the MCLR with a view to bringing necessary refinements and exploring market rates as alternative benchmarks.
Since effective monetary transmission is the key to successful implementation of monetary policy, the RBI will be conducting another study to assess the impact of liquidity swings on the transmission of monetary policy impulses.