Will car, home loan interest rates be lower after RBI's repo rate cut?

The Reserve Bank of India (RBI) has cut the repo rate, the rate at which banks borrows fund from the central bank, from 6.25 per cent to 6 per cent.  The RBI's move shifts the spotlight on banks to reduce their lending rates. Will they follow suit:

i)  New borrowers to get benefit
The new retail and corporate borrowers will get the benefit as there is already a stiff competition among banks for underwriting new business. The credit offtake is already at a historic low with only retail loans growing robustly. The bankers would certainly offer lower interest rates for home, car, personal loans, etc.  

ii)  Existing borrowers to wait
The banks are facing huge pressure on their profitability because of  deterioration in asset quality. The provisioning requirement for NPAs have been eating their  profitability as well as capital.  In the past , banks have been quite slow in passing on the rate cut benefit to existing borrowers. This may continue as banks would like to protect their margins.

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iii)  Gradual decline in deposit rates
For the first time, the largest bank, the State Bank of India (SBI) has decided to cut the savings bank rate from 4 per cent to 3.5 per cent. In the past, despite getting huge inflows of deposits post demonetisation, banks have been quite reluctant  in reducing interest rates. But the action of SBI  shows that they are now faced with a situation of huge pile of deposits ( where they have to pay fixed interest) and not enough opportunity to lend in the market. Any reduction in savings rate would reduce the cost of funds for banks. In fact, other big banks are also likely to follow suit. This will have a positive impact on cost of funds , which would result in reduction of lending rates going forward.

iv)  RBI to focus on monetary transmission
In the past, banks have been quite slow in transmitting the benefits of rate reduction to final borrowers. The RBI is not very happy  about it. A year ago, it also introduced a new marginal cost of funds based lending rate (MCLR), but that, too, didn't giving satisfactory results. The RBI has now constituted a working group to suggest ways to improve the transmission. The group is expected to submit the report by September end. Once the report would be out,  the banks will have to adopt the new  system of better transmission.

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v)  Cleaning the balance sheet
The RBI is also addressing the larger issue of cleaning the balance sheets of banks. Half a dozen banks are already under the care of RBI's preventive corrective action (PCA).  If banks are healthy, they would be in a better position to transmit the rates. This is a larger issue that would take some time, but RBI is working towards it.

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