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'RBI should cut rates by 75 bps; ensure banks pass on benefit'

Monday, February 06, 2017

The Reserve Bank should cut interest rate by 0.5-0.75% in view of dismal credit growth as well as subdued demand and, along with government, nudge banks to pass them on at a time when demonetisation has led to "windfall gains", an industry body said yesterday. As the RBI Monetary Policy Committee meets on February 7-8 for next bi-monthly credit policy, Assocham has impressed upon the central bank and the Finance Ministry "to ensure adequate transmission of cuts in the interest rates".

The industry is expecting at least 50-75 basis points reduction in the policy interest rates and the banks should pass on the entire benefit to the borrowers, it said in a press release. "This is because the demonetisation has resulted in windfall gains for the banks in the form of ultra low cost funds from the current account/saving account (CASA). The CASA rates are just about 3-4%, while the base lending rates are still near the double digit. That is a huge spread for the banks which should transmit lower rates without necessarily cutting the time deposit rates," it added.

Assocham President Sunil Kanoria said: "As a majority owner of the banks and as a regulator, both the government and the RBI have roles in advising banks to pass on the commensurate reduction in the interest rates. "This is all the more important in the wake of dismal credit growth, marked by subdued consumer demand and lack of investment appetite despite lowering of the lending rates."

The industry body however expressed apprehension that fresh borrowings by firms could still be away as companies continue to grapple with high levels of existing debts. "The banks should pass on the benefit of the lower interest rates on the old loans through different means so that the interest burden for the companies comes down," it said, adding that even small quantum of reduction in interest rates makes a big difference when the loan size is pretty large.

Along with other measures like protection of cheap imports, the benefits of the ample liquidity in the banking system must be extended to the firms grappling with the old loan books without much delay, it said.

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