Here's why your wait for cheaper loans just got a little longer

MUMBAI: HDFC Bank lowered its lending rates marginally, but home loan borrowers and businessmen may be disappointed with the reduction even as Reserve Bank of India Governor Raghuram Rajan indicating it may be a while before banks take to accelerated reductions.

RBI, which paused on interest rate reductions on Tuesday, said it would review its Marginal Cost of Lending Rate (MCLR) policy that was introduced in April and sort out some teething troubles as banks adjust to the new system of lending that is determined by their cost of funds.

But borrowers can hope for interest rates to soften over the next few months. Rajan said the credit growth in April and May has not been strong, while deposit growth has been fairly strong.

“So, my hope is, as deposits keep building up on the liability side, banks then find more of a need to make those deposits go to work, other than investing through government securities,” said Rajan. HDFC Bank, taking a cue, cut lending rates by 5 basis points to 9.20% for two years but many see this as a move to align its rates with those of State Bank of India.

But, Bank of Baroda did the opposite. It raised lending rates for one year by 10 bps to 9.40% after the RBI policy and decided to levy strategic premium of 0.25% over and above the MCLR. SBI charges MCLR of 9.15% on one-year loan.

Rajan felt that poor demand from corporates could have refrained banks to lower lending rates, which means that retail borrowers will have to wait a little longer for rate cut too. “In general I think, there is a paucity to some extent to credit demand from usual sources, which is why banks are not in a great hurry to reduce rates either.

They seem to be suggesting that we are not going to attract whole lot of credit if you reduce rates, so why not stay with existing borrowers and so on.” Rajan is however hopeful that competition would drive down rates.

“Ultimately it is the competition, which forces the bank into this. Some banks have stressed balance sheet. …they focus on stressed assets than anything else. Over the time the healthy bank will generate lending.”

RBI said that it would review the implementation of the new benchmark lending rates MCLR which was introduced from April this year. MCLR has replaced base rate and was introduced to improve the transmission of policy rates.