RBI wants your home, car loans to get cheaper, but your bank is a hurdle

The Reserve Bank of India (RBI) reduced the repo rate by 35 basis points to 5.4 per cent on Wednesday, its fourth straight cut since February 2019, but banks have not matched the benefit in the loan rates offered to their customers. The high-powered Monetary Policy Meet, chaired by RBI governor Shaktikanta Das, in February saw repo rate cut of 25 basis points to 6.25 from 6.5 per cent. Since then, the MPC has done four consecutive repo rate cuts. However, banks have shied away from reciprocating the benefit to ease the burden on customers.

With the RBI reducing repo rate by 110 basis points in 2019 alone, banks can borrow short-term loan from the apex bank at 5.40 per cent -- the lowest since 2010. While the RBI cut repo rate by 2.6 per cent since 2014, SBI cut its floating rate -- MCLR for loan amount between Rs 30-60 lakh -- by 1.1 per cent only. The floating interest rate varies according to the repo rate set by the RBI.

Ideally, banks are supposed to pass on the benefit immediately after the repo rate cut, which can bring the interest rates on loans, including home loan EMIs, down significantly. Experts cite the slowdown in household savings, bad loans, and persistent liquidity crunch in the NBFC (non-banking finance companies) sector as the major reasons behind banks not adjusting lending and deposit rates.

Also read: RBI repo rate cut: How much will your home and car loan EMIs reduce?

The RBI, however, is hopeful. In its bi-monthly meeting held today, the RBI said the transmission of policy repo rate cuts on fresh rupee loans had improved marginally in the past two months.  "Overall, banks reduced weighted average lending rates (WALRs) -- the aggregate rate of interest paid on all debts -- on fresh rupee loans by 29 basis points during February-June 2019 period," said the MPC.

Meanwhile, immediately after the RBI rate cut on Wednesday, State Bank of India reduced lending rates (MCLR) by 15 bps across all tenors effective August 10. The bank has also reduced one-year lending rates to 8.25 per cent from earlier 8.4 per cent. Before this, SBI reduced interests offered on time deposits of up to 179 days by 50-75 basis points, effective from August 1. The SBI also slashed interest rates on retail deposits by 20 bps and 35 bps in the wholesale segment.

Following the lead, some public and private lenders, including HDFC Bank, also reduced deposit rates by up to 25 bps. PNB lowered interest rates by up to 0.50 percentage points on certain maturities, while HDFC Bank revised its interest rates by 10 bps on fixed deposits below Rs 2 crore on deposits maturing in one year to two years. Most banks, including private and public, follow SBI on the transmission of interest rates.

Surendra Hiranandani, Chairman and Managing Director, House of Hiranandani, stated that going forward, "it is imperative for banks to reduce the lending rates and ensure that the home loan borrowers reap the benefits of this move". Real estate, he noted, is a highly cost sensitive sector. "Demand will only pick up if the cut is substantial to result in significant cost savings".

Also read: RBI policy: Why repo rate cut is unlikely to stir housing demand