Banks are to improve their interest rate transmission said Finance Minister Nirmala Sitharaman. She asked the state-owned banks on Tuesday to hold board-level talks and go for further cuts in interest rates on loans in a bid to spur economic activity.
“The FM told bankers that interest rate transmission is not happening as expected, and asked them to take up the matter at board level. The government was skeptical about a slower monetary rate transmission by public sector banks (PSBs) till now,” a person who was present in the meeting said, requesting anonymity.
In the meeting with PSB chief executives, the FM also asked them to expedite the sanctioning of loans under the Emergency Credit Line Guarantee Scheme (ECLGS) to provide additional funding to firms to the tune of Rs 3 trillion. Banks expect to sanction the fully-guaranteed emergency credit line to firms by the end of August.
Since February 2019, the RBI has reduced the repo rate (the interest rate at which commercial banks borrow from the central bank) by 185 basis points, which now stands at 4 percent.
A top PSB executive said the bank had transmitted 120-140 basis points till date, and expressed concerns that a further cut in interest rates would impact its finances. It’s difficult for Banks to improve interest rate transmission without reducing savings interest rates for deposits.
“Banks have to be viable and look at their own profit margins. The depositors’ needs have to be kept in mind too. Bringing down the interest rate on loans without reducing the deposit interest rate wouldn’t make sense. By trying to bring down the rate, banks cannot kill the depositors’ franchise,” the bank executive said. The executive pointed out that the coupon rate for the government paper was 6 percent and often banks were offering loans to top-rated firms below this rate.
“It’s not as if the transmission is not taking place. Even the RBI admits it’s happening, but there is a lag in the monetary rate transmission as deposits are for a longer tenure,” the executive said. On ECLGS, the FM told PSB executives to quickly sanction loans. “Even though we sanction loans, the disbursements are taking place slowly and will pick up only by the end of this month or in July with more economic activities,” the bank executive said. Till June 5, PSBs have sanctioned loans worth Rs 17,705 crore under the scheme, out of which Rs 8,320 crore has been disbursed.
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