Reserve Bank of India (RBI) Governor Shaktikanta Das on Friday came down heavily on public sector banks (PSBs) for not reducing their lending rates despite liquidity remaining ample, bond yields being at a multi-year low, and policy rates being lowered by 75 basis points (bps) in the past six months.
“Bond yields have come down, policy rates have fallen, the borrowing cost for banks is low, as is evident from softening rates on certificates of deposit (CD), and liquidity is in surplus. I am surprised banks are still not lowering lending rates,” Das told top PSB executives during a meeting, confirmed multiple sources.
According to a statement uploaded on the RBI website, the governor discussed credit and deposit growth amid a slowing economy. Even as credit growth remains muted, the flow of credit to the needy sectors should not be hampered “while following prudent lending, robust risk assessment and monitoring standards”, he said.
Sources said the governor had a word of caution for the retail segment. Since all banks are now devising their growth strategy focusing on retail, which is a small sub-set of the overall, banks need to be cautious and retail growth should be in sync with the risk policies set by individual bank boards, Das said, adding that risk monitoring and assessment should be robust for retail loans.
The governor also nudged banks to lend to non-banking financial companies (NBFC), instead of remaining risk-averse, since NBFCs are dependent on bank loans.
The statement by the RBI said Das discussed the “recent initiatives to address issues relating to NBFCs and the role banks can play in mitigating lingering concerns”.
Banking sources said the governor stressed that the central bank had taken enough measures to help provide liquidity to the sector through banking channels, but banks had not shown much willingness to avail of those. He discussed giving impetus to the resolution of stressed assets facilitated by the revised framework for resolution announced by the RBI on June 7, according to the statement.
Das was also critical of banks’ recovery efforts. According to the governor, banks are not doing enough to improve their recovery mechanisms, but are content with whatever they get by invoking the Insolvency and Bankruptcy Code (IBC). He also disapproved of the practice of aggressive write-offs of bad loans, instead of putting extra efforts to recover them,
The governor was also disappointed with banks’ inability to detect frauds early and prevent them.
The recent fraud involving Bhushan Power should have been picked up early, he said, adding banks needed to improve on their early warning signs. “On the suggestion of the governor, it was agreed that banks will identify one district in each state to make it 100% digitally enabled within a time frame of one year in close co-ordination and collaboration with all stakeholders …,” the statement said.
But the highlight of the meeting undoubtedly was governor’s criticism of banks for not lowering their lending rates. “The governor was unusually critical today, and the message was put out very clearly that lending rates on both new and old loans need to come down, and quite fast,” said a banker who attended the meeting, requesting anonymity.
The RBI cannot force a bank to cut rates, since it is a commercial decision. Instead, it can create enabling provisions to help them lower their rates. While the RBI has created such conditions, banks have been dragging their feet in order to recover their costs needed to do provisioning for bad debts.
The governor, sources said, was in no mood to listen to the same old argument of small savings rates being much higher than bank deposit rates. “His central argument was that all things remaining equal, banks are morally obliged to pass on the rate benefit that they are enjoying now because of the enabling conditions,” said a source.
The bankers promised to the governor that his viewpoint would be taken up at the board level for consideration. They said deposit rates would have to come down first.
Since February, RBI has executed three back-to-back policy rate cuts of 25 bps each in every bi-monthly policy meet, but banks have lowered lending rates on new loans only by about 30 bps. On old loans, the banking system does not pass on the rate benefit.
Most economists expect the central bank to cut the repo rate by another 25 to 50 bps. However, unless banks cut their lending rates, policy rate cuts become meaningless.
So far the banks’ logic was that the system liquidity was in deficit, which kept yields at an elevated level. And since lending rates are linked with bond yields, they couldn’t lower it. However, yields on the 10-year bonds have fallen about 110 bps since the start of the year, aided by a record Rs 3 trillion secondary market bond buyback by the central bank. The system is running a liquidity surplus of Rs 1.5 trillion, from a deficit of more than Rs 1 trillion two months ago.
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