Mumbai: Indian banks have started cutting lending rates after a massive inflow of deposits spurred by the demonetization of high-value banknotes led to a significant reduction in the cost of funds.
Reduced lending rates on the back of credit sops for a few segments announced by the prime minister on Saturday could potentially kickstart stagnant credit growth, bankers and analysts say.
On Sunday, State Bank of India, the country’s largest lender, cut its marginal cost of funds-based lending rate (MCLR) across all tenors by 90 basis points (bps), the steepest cut in several years. The six-month MCLR is now 7.95% and the three-year rate stands at 8.15%.
A basis point is one-hundredth of a percentage point.
MCLR is the benchmark lending rate at which a bank prices all its loans.
Other public sector lenders Punjab National Bank (PNB) and Union Bank of India (UBI), too, have brought down the benchmark interest rate.
PNB has cut its one-year MCLR rate by 0.7% to 8.45% from 9.15%, effective Sunday. Union Bank of India has reduced its MCLR by 0.65-0.9% to 8.65%. The revised one-year MCLR stands at 8.65%.
Welcoming the rate reduction by the banks, economic affairs secretary Shaktikanta Das said in a tweet, “Trend of interest rate reduction follows demonetisation. Banks have substantial quantum of low cost funds now.”
“Welcome reduction of interest rates by SBI. Loan disbursements expected to pick up. Positive for the economy,” he added.
SBI’s rate cut follows IDBI Bank’s and State Bank of Travancore’s rate reductions on Friday, when they cut their MCLR by 15bps and 30bps respectively. Union Bank of India cut its MCLR by 65-90bps across tenors, and other banks are expected to follow suit.
Since the government on 8 November banned Rs500 and Rs1,000 currency notes, banks have received a flood of deposits—Rs12.44 trillion of deposits in old notes by 10 December, according to the last figure released by the Reserve Bank of India. As of 9 December, the deposit growth rate had widened to 15.9% year-on-year, while credit growth had slowed to 5.8%.
Banks’ cost of funds has come down as a result of the deposit influx. The Employees’ Provident Fund Organisation cutting its interest rate to 8.65% from 8.8% in December was also a signal of loan costs coming down.
While banks cut interest rates on deposits, (SBI, for instance, cut rates on bulk deposits, of over Rs1 crore, by as much as 190bps), they hadn’t passed this on to lending rates. In comparison, SBI cut MCLR by just 15bps in mid- November. With the current rate cut, however, it has passed on the entire policy rate cut during this cycle.
“The reduction in the MCLR is expected to positively impact loan growth both in the retail consumer segment and in corporate sector lending, thereby supporting growth impulses in the economy,” IDBI Bank said in a statement.
The rate cuts dovetail with Prime Minister Narendra Modi’s announcement of a range of credit sops for the urban and rural poor, the lower middle class and women on New Year’s Eve.
These include interest rate subsidies on housing loans of up to 4%, a 60-day interest waiver scheme for farmers and a doubling of the credit guarantee for medium and small enterprises—measures which are likely to increase credit offtake. The prime minister also said that under the Pradhan Mantri Awas Yojana, 33% more houses will be constructed.
“As credit offtake is a challenge currently, retail and agriculture are the only lending opportunities available for banks. These are also segments most affected due to demonetisation. In that sense, there could be some pickup in credit growth,” said Karthik Srinivasan, senior vice-president at rating agency Icra Ltd.
Increasing credit growth would also benefit the economy, which is facing a disruption after the note ban. Opinion is divided on the extent and duration of the impact of demonetization, but some economists have already lowered their estimate of growth this year by 50-330bps.
With large corporate credit growth slowing significantly over the last two years, measures aimed at stoking demand in the lower-ticket size categories such as agricultural loans, micro, small and medium enterprises (MSMEs) and low-cost housing is likely also the government’s way of boosting bank credit growth during 2017.
RBI data for November show credit growth to industry shrank 5.5% from April to November 2016 compared to 0.4% growth a year ago. Similarly, housing loan growth slowed to 9.9%, while credit to the agriculture sector fell to 2.9% pace.
Bankers said that Modi’s announcements should help in a growth push.
“Low-cost housing should witness growth in the medium to long term,” SBI chairman Arundhati Bhattacharya said in a statement on Saturday.
“The measures announced by the prime minister in terms of encouraging housing for lower-income groups will reinvigorate the sector and would go a long way in aiding financial inclusion,” said Shikha Sharma, managing director and chief executive officer, Axis Bank, in a statement on Saturday.