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RBI: Monetary transmission improving in SME and retail segments
There are early indications of an improvement in transmission to bank loans sanctioned in the retail and small and medium enterprises (SME) segments, where new floating rate loans have been linked to external benchmarks.
As per the Reserve Bank of India report, there are early
indications of an improvement in transmission to bank loans sanctioned in the
retail and small and medium enterprises (SME) segments, where new floating rate
loans have been linked to external benchmarks.
The report which got published as part of the central bank’s
monthly bulletin for March 2020, states that the weighted average lending rates
(WALRs) charged by domestic banks on fresh rupee loans sanctioned for the
housing sectors declined by 38 basis points (bps) and that on vehicle loans by
47 bps between October 2019 and January 2020.
The WALR of domestic banks in respect of loans to micro,
small and medium enterprises (MSMEs) also dropped 59 bps in January. However,
the WALR in education loans increased marginally by 1 bp in January.
The reserve bank of India stated, “the external benchmark
framework will quicken transmission to lending rates (i) as any change in the
benchmark rate will lead to a change in lending rates for new borrowers; (ii)
for existing borrowers, banks would need to reset interest rates at least once
in three months as against typically one year in the case of loans linked to
the MCLR (marginal cost of funds based lending rate); and (iii) by constraining
banks from adjusting their spreads arbitrarily for existing borrowers.”
The RBI report also explained that under the MCLR system,
transmission to lending rates is indirect and contingent upon changes in
deposit interest rates. However, under the external benchmark system,
transmission to lending rates will no longer be contingent upon deposit
interest rates.
As and when the monetary policy committee changes the policy
repo rate, lending interest rates will change, at the most within a quarter. “Banks
will then need to adjust their deposit rates to protect their NIMs (net
interest margins),” the report said.
Among the reasons for poor transmission of rate reductions
through lending and deposit rates, the central bank mentioned that the long
maturity profile of deposits at fixed interest rates, rigidity in savings
rates, the legacy of base rate loans,
the periodicity of interest rate reset under the MCLR system, competitive pressure from mutual funds and small savings
schemes as well as poor asset quality of banks.