Loan EMIs may not fall as banks struggle with bad loans

Your loan EMIs may see a slow or no reduction as banks struggle with high deposit costs and bad loans.

Your loan EMIs may see a slow or no reduction as banks struggle with high deposit costs and bad loans.

The Reserve Bank of India cut key policy rate by 0.25% on Tuesday.(REUTERS)

Signalling lower interest rates going forward, the Reserve Bank of India cut key policy rate by 0.25% on Tuesday, which means banks will get short-term funds at a lower cost.

However, consumers may not benefit from this reduction in cost as banks are still struggling to pay higher interest on deposits.

Rajnish Kumar, managing director, State Bank of India, said, “There is still some rigidity on the deposits. We have blocked our funds to pay higher interest rates on fixed deposits of 3-5 years. Hence, further rate cuts on loans will depend on how the deposits will flow going forward. There is a possibility (of a reduction in lending rates) but our ALCO (asset-liability committee) will meet this month and decide that.”

Beginning October, a few banks, including SBI, ICICI Bank and the Bank of Maharashtra, have reduced their minimum lending rates.

SBI, the country’s largest bank, has already cut its MCLR (marginal cost-based lending rate) by 0.05% on one-year loans from October 1 to 9.05%. Its home loan rate is 9.30% (9.25% for women).

ICICI Bank, the nation’s largest private bank, has also made a similar rate cut, but it offers home loans at 9.35% (9.30% for women).

Abhishek Bhattacharya, director at India Ratings and Research, said, “There is less headroom as banks are still struggling to maintain their margins due to bad loans and less high earning assets… So we could see further cuts of about 0.05-0.20% for big banks but mid-sized and lower banks may not cut rates.”

Since April, when the new MCLR was implemented (to improve the transmission of rate cuts), private banks have fully passed on the rate cuts and reduced lending rates by 0.25%, while public sector banks have cut rates by 0.15%.

“I agree that transmission (from policy rates) to bank lending to bank borrowers has been less,” said RBI governor Urjit Patel.

He further said since the banks complained of high small savings deposit rates, the government reduced these.

SBI chairman Arundhati Bhattacharya also indicated a wait-and-watch approach on lower lending rates. She said, “Banks will continue to transmit rates based on evolving liquidity scenario.” Liquidity is the availability of funds to lend.

Patel said the MCLR calculation “will itself throw up more transmission going forward”.

Including Tuesday’s cut, since January 2015, the RBI has cut interest rates by 1.75%, while overall, banks have transmitted barely 0.60%.