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Rajan sees red on bankers' reluctance to pass on cheap money to borrowers

Mumbai: Continuing to vent his anger over bankers' reluctance to pass on benefits of lower interest rates and easy liquidity positions to borrowers, outgoing RBI Governor Raghuram Rajan Tuesday said the central bank will soon revise the marginal cost of fund-based lending rate framework to help fasten up process of policy transmission.

Complaining that banks have passed benefits only in a "modest" measure to borrowers, Rajan said a pick-up in credit demand that shall follow the economic recovery and competition for corporate loans after the ongoing balance sheet clean-up by the state-run lenders, will ensure softer lending rates.

 Rajan sees red on bankers reluctance to pass on cheap money to borrowers

Raghuram Rajan. PTI

Rajan charged bankers with inventing newer alibi for delaying the rate cuts and pointed out that concerns over the FCNR(B) redemptions, despite RBI's public assurance of making it non-disruptive, are the latest one in a series.

"Earlier, some bankers said it was lack of liquidity that was holding the rates high. Now, I hear from some that it is the fear of FCNR redemptions that is making them reluctant to cut rates. I have a suspicion that some new concern will crop up once FCNR redemptions are behind us," Rajan said.

"We would be happier if there was more transmission," he said, adding that the RBI is sensitive to "some of the difficulties" which banks have to face following the balance sheet clean-up.

Rajan, who switched the stance of the monetary policy to be accommodative starting January 2015 and has effected rate cuts of 1.50 per cent till now, has been complaining for long about banks' reluctance to pass on the cheaper money to borrowers.

Rajan has also presented data suggesting banks have only passed on a third of the rate cuts so far. Added to the rate cuts are RBI actions on the liquidity front, which have created a condition where on some days, banks have parked their excess money with RBI using the reverse repo facility.

To make transmission swifter, the RBI introduced the MCLR from April 1 this fiscal which has lowered the minimum cost of bank funding by up to 0.30 percent.

"Having examined our experience with the MCLR framework, we will shortly be suggesting some revisions," Rajan said today.

He, however, noted that a "substantial pass through" of the rate cuts is possible only when the sagging corporate credit demand picks up on economic recovery.

Competition between banks for this demand, which is possible when they have cleaned up their balance sheets, will force them to down their rates, he said.

"Substantial pass through will happen only when corporate credit demand picks up and as public sector banks, strengthened by clean balance sheets, compete for corporate business," he concluded.

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Updated Date: Aug 09, 2016 15:52:21 IST

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