India’s central bank is calling on the country’s lenders to lower rates

• After a rate cut in February, the mandate of the central bank was clear: it wants to boost lending and thereby stimulate economic growth.
  
• However, the country’s commercial lenders have been slow to pass on the rate cut to consumers.
  
• As a result, the governor of the Reserve Bank of India, Shaktikanta Das, met with the CEO’s of the country banks to do so. The banks complained that they didn’t have much room to cut rates but said they would try their best.
  

After a rate cut in February, the mandate of the central bank was clear: it wants to boost lending and thereby stimulate economic growth as the country heads into national elections. And now it wants Indian banks to follow suit.

However, the country’s commercial lenders have been slow to pass on the rate cut to consumers in the form of cheaper small business loans, home loans and car loans.

As a result, the governor of the Reserve Bank of India, Shaktikanta Das, met with the CEO’s of the country banks - such as Punjab National Bank, ICICI Bank, Kotak Bank, Bank of Baroda etc - yesterday to exhort them to cut lending rates for customers so as to encourage consumer confidence and investment.

While the banks’ response was mostly non-committal, they said they would try their best to cut rates on home loans and personal loans. They have complained in the past of their high borrowing costs and shrinking margins - both of which are a consequence of their stock of bad loans. They also pointed to a lack of liquidity in the banking system, as consumers are hoarding cash ahead of elections.

After the rate cut decision, wherein the base lending rate was cut by 25 basis points to 6.25%, the State Bank of India only cut home loan rates by a mere 5 basis points. The only other bank to do the same was Bank of Maharashtra - by the same measly amount.

Earlier this week, the chairman of State Bank of India, Rajnish Kumar, said that banks did not have the room to cut lending rates because it would need to cut its deposit rates first. And it couldn’t do this unless other banks did so as well, because otherwise its customers would park their money in banks with higher deposit rates.


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