Hours after RBI governor Shaktikanta Das's call, Axis Bank says linking loans to repo is not the only way for faster transmission

Even as governor Shaktikanta Das pitched for system-wide adoption of repo-linked pricing of loans and deposits, private sector lender Axis Bank on Monday said it is not the only measure for better transmission of central bank's policy moves.

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Axis Bank, the third-largest private sector lender's executive director for corporate lending Rajiv Anand blamed liquidity issues prevented banks cutting the lending rates till June and that with better liquidity conditions since then, banks have been passing on the benefits of the RBI rate cuts, PTI reported.

With the further easing in liquidity conditions as seen in the recent days through the excess availability of Rs 2 trillion per day, banks will do more rate cuts, Anand said.

"It's not necessary to use only external benchmarks, there are multiple avenues to meet the requirement that the RBI wants us to do... What RBI is essentially looking at is that the rates are being cut and there should be better transmission," he said.

Anand was speaking to reporters on the sidelines of the annual industry conference Fibac, hours after Das made the suggestion that the time has come to formalise the external benchmark or repo-linked system for new loans, which will ensure faster transmission of rates.

The comments come at a time when pushing up the sagging economic growth has become the biggest focus for the policymakers, which has ensured rate cuts of 110 bps by the RBI in four simultaneous rate cuts.

Representative image. Reuters

Anand also flagged the risks of such a move of linking interest rate to the repo rate set by RBI for the customers.

"Remember that repo rates typically will be more volatile than MCLR for example," he said, speaking in support of the present marginal cost of funding based lending rate being followed at present. Generally, we've seen that retail customers, when the rates are falling, they want to see faster transmission but remember that faster transmission will happen on the way up as well," he said.

Anand said the retail customers do not wish for volatilities in their loan pricing and hence, such linkage will be more useful for the corporate borrowers.

"As long as banks are able to meet the requirement as to transmit faster, I think there are multiple roads to achieve that," he said.

Commercial banks' inability to cut loan rates

Commercial banks cite high deposit rates for their inability to cut loan ones. Marginal reductions restrict how much borrowers benefit from the repo cuts, Reuters said.

It can be noted that market leader SBI has been the first to move by linking its loan pricing to newer borrowers to the repo rate, while its closest rival Bank of Baroda has also followed suit. “I expect more initiatives and this process to become faster,” Das said on Monday, adding that the RBI has been in talks with banks ensure “faster and greater” adjustment of rates, according to Reuters.

State-run PNB managing director Sunil Mehta told reporters that the lender will also be making a shift in the next seven days and added that there is adequate liquidity in the system.

Declining to spell out whether his bank is planning to offer repo linked loans, Anand said Axis Bank's asset-liability committee will take a call on the same.

To a question about the fate of existing borrowers, and if they also get to enjoy the benefits of lower repo rates, SBI chairman Rajnish Kumar said all of it will depend on how soon the banks are able to reprice its old liabilities, but declined to give a timeline for the same.

It can be noted that till the last rate cut of 0.35 percent, the banks have passed out only 0.29 percent of the 0.75 percent in rate cuts initiated by the RBI to the final borrowers. However, RBI's last cut delivered earlier this month has led to a rash of rate cuts by the lenders by up to 0.10 percent.

Consider this: If one count from the start of this rate cut cycle, the repo rate, at which the RBI lends short-term funds to banks, has come down by not less than 110 bps. How have banks responded? The benchmark lending rates of major banks have come down by just 15-30 bps. That means, banks still have scope to further reduce their lending rates by at least 80 bps in their lending rates if these entities choose to pass on the full benefit of the RBI rate cuts to the end-borrower. Not only that such a 30 bps cut has not really helped the borrowers, while a quarter basis points decline in deposit rates have hurt bank depositors in a significant manner, PTI said.

Even a 30bps cut wouldn’t make much difference in the EMI burden of a retail borrower beyond a few hundred rupees. On the other hand, every bps cut in FD rates would hurt FD holders’ returns badly.

It is in this context that the RBI is asking banks to fix their lending/deposit rates to an external benchmark. Linking the lending rate to the repo will certainly bring in more transparency. Presently, it is up to each bank to choose the benchmark rate to prepare their final rate under the MCLR mechanism. By now, it is clear that the MCLR mechanism has failed to ensure that banks pass on RBI rate cuts to their borrowers.

--With inputs from agencies