What made banks to cut lending rates now?

The quick move by the banking sector to slash lending rates after RBI reduced key policy rates has put up a question: Why banks did not pass on the benefits to the consumers instantly when similar decisions on rate cuts?

www.sevagiri.com

The RBI has cut repo rates by 50 basis points from 7.25 per cent to 6.75 per cent recently, which is a welcome move both for the real estate industry and the banking sector. The RBI has reduced policy rates by 125 basis points cumulatively.

Soon after RBI has made the announcement, the country’s largest lender, the State Bank of India (SBI) has cut down lending or base rate by 0.4 per cent to 9.3 per cent. Currently, HDFC’s base rate is at 9.3 per cent and Axis Bank has lowered its base rate to 9.5 percent.  

Sources said that the government is constantly monitoring the situation of the impact of RBI’s rate cuts in the market. “In fact, there is a pressure from the Ministry of Finance on banks to reduce the rates at which they lend to the industry, and individuals. The banks do not borrow loans from RBI but the banking system depends on deposits so a fluctuation in the lending rates affects the banking sector,” sources told in a condition of anonymity.The real estate sector was expecting such moves by the banks since a long time but things did not turn out positively. The RBI Governor, Raghuram Rajan was concerned about delay in the monetary transmission of rate cuts by the banks. He also said that “the real estate prices need to come down in order to ease lending norms for home loans.”

Such moves also indicate a positive picture and building the confidence level of the consumers in the potential market. It will now boost the investment flow in the sector and increase the sale of unsold inventory stock as well. The banks are usually very cautious while lending to the industry. And, as the demand is less and the macro economic situation is slow in the real estate sector with limited investment possibility, the banks are quite apprehensive in lending the sector. This is a reason why banks maintained a wait and watch approach.

Also, the banks did not pass on the benefits to the consumers because the costs of deposit have gone down. The commercial banks face immense problem if the costs of deposits are less.  The sector is facing a huge slowdown for last 2-3 years, resulting in significant delays in completion of projects. Many stalled projects are not proceeding due to government clearances and bureaucratic hurdles.

The banks already had two years of unsold real estate inventories and home loans in the books of accounts.  In such a condition, the banks were wary about issuing fresh loans to the real estate customers or developers. Moreover, the real estate developers have borrowed money from the non-banking financial companies (NBFC) at high interests’ rates between 21-36 per cent, so, they are already under pressure of high costs of debt.

Now as the banks have cut the rates, the business climate may soon clear up and possibilities are that the sales growth will pick up in the near future. We hope that the RBI’s moves to bring down key rates will likely boost investor’s sentiments in the market.

Source - TOI