Bank Borrowers Still Waiting as RBI Rate Cuts Take Time to Reach Their Pockets

Despite the Reserve Bank of India’s (RBI) 50 basis points repo rate cut and liquidity infusion, a significant portion of borrowers have yet to see benefits due to reliance on MCLR-linked loans. The one-year median marginal cost of fund-based lending rate (MCLR) remained unchanged at 9% in April, particularly affecting public sector borrowers.  

 

Banks’ deposit costs and competition for funds are hindering faster transmission of rate cuts, impacting net interest margins. While over 60% of floating rate loans are priced on external benchmarks like the repo rate, nearly 36% are still linked to MCLR, delaying the impact of regulatory rate cuts.  

 

The weighted average lending rate (WALR) on fresh rupee loans and outstanding loans fell month-on-month by 5 basis points and 3 basis points, respectively, to 9.35% and 9.77% in March. However, the transmission of rate cuts happens more quickly for repo-linked benchmark rates, whereas MCLR-linked rates take at least two quarters to reflect changes.  

 

Additionally, banking system liquidity was in deficit for a large part of March, leading to elevated fixed deposit rates. Some banks have also reduced savings deposit rates to protect their net interest margins (NIMs). Analysts suggest that the extent of reduction in NIMs will depend on banks’ ability to manage deposit costs amid intense competition.  

 

Source: Economic Times