personal finance

Existing bank loans turn cheaper, a year after the beginning of rate cut cycle

KOLKATA: Monetary transmission, which measures banks’ response to Reserve Bank of India‘s rate cuts, has turned positive for outstanding rupee loans for the first time since February last, when the central bank embarked upon a new rate cut cycle.

This means, existing bank loans have now started turning cheaper.

The transmission has been slow for new loans even as RBI cut the benchmark policy rate by 135 basis points since February 2019 but it was non existent or negative for existing borrowers. Some existing borrowers had paid monthly instalments at higher rates during the same period.

RBI said the weighted average lending rate (WALR) on outstanding rupee loans declined by 13 bps during February-December 2019. WALR on outstanding rupee loans rose by 2 basis points till December.

“Transmission to the credit market is gradually improving,” RBI said. The one-year median marginal cost of funds-based lending rate (MCLR) declined by 55 bps during February 2019 and January 2020. WALR on fresh rupee loans sanctioned by banks has now dipped by 69 bps during February-December 2019, against 44 bps dip noted in December.

The improvement in transmission has been due to the introduction of the external benchmark system from October 1 last year, which forced most banks link their lending rates for housing, personal and micro and small enterprises (MSEs) to the policy repo rate. RBI cut repo rate by 25 bps in October policy.

“It is necessary to recognise that transmission across various money market segments and the private corporate bond market has been sizable. The external benchmark system has helped banks reduce rates,” RBI Governor Shaktikanta Das said after announcing status quo on repo rate on Thursday. “These developments should amplify the effects of the cumulative policy rate reductions since February 2019 and pull up domestic demand going forward,” he said.

The money market however responds faster to RBI’s policy. Transmission to various money and corporate debt market segments up to January 31, 2020 ranged from 146 bps (overnight call money market) to 190 bps (3-month commercial papers of non-banking finance companies). Transmission through the longer end of government securities market was at 73 bps (5-year government securities) and 76 bps (10-year government securities).


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