More room for banks to pass on rate cuts: Raghuram Rajan

RBI Governor Raghuram Rajan on Tuesday said that there is more room for rate cut by banks as the lenders on an average have only passed less than half of the 1.25 per cent reduction announced during 2015.

“I think if you look at 1-3 year deposits, banks have already cut significantly more than what has been transmitted through the base rate. In that sense, there is room building up for the banks to transmit more. I think it is a matter of time as these costs flow through,” Dr. Rajan said.

“Thus far, we have seen only half the interest rate cuts since January passed through. We are working with the banks...,” he said after unveiling fifth bi-monthly monetary policy statement, 2015-16 here.

Since the rate reduction cycle that commenced in January, less than half of the cumulative policy repo rate reduction of 125 basis points has been transmitted by banks, he said, adding, the median base lending rate has declined only by 60 basis points.

The RBI in four installments reduced interest rate by 1.25 per cent to 6.75 per cent. The first rate cut of 0.25 per cent was effected in January, followed by similar rate cut in March. The third rate cut of 0.25 per cent was done in June.

In the last policy review on September 29, the RBI had slashed interest rate by 0.5 per cent.

The benchmark repurchase (repo) rate has subsequently come down from 7.25 per cent to 6.75 per cent, the lowest in four-and-a-half years.

Banks have been saying the high small saving rates are hindering banks from reducing interest rates. If banks reduce rate unilaterally, they will become uncooperative.

The rate reduction on small savings like PPF and post office deposit is also going to bring down the cost of fund for banks.

“The government is considering small saving rates and tying them more to market interest rates. I think both these actions will help transmission,” he added.

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Student loans dry up as bad debts climb at banks

An increase in non-performing assets have led several public sector banks to go slow on educational loans, latest data complied by the Finance Ministry shows.

“Banks have achieved 50 per cent of the disbursal targets of the year 2015-16 up to 30 September,’’ according to a note circulated among chief executives of the public sector banks before Finance Minister Arun Jaitley met the bankers on Monday. “`However, banks namely the Corporation Bank, Dena Bank, IOB , UCO Bank, SBI, State Bank of Patiala, State Bank of Hyderabad and the State Bank of Travancore have not achieved proportionate targets,” the note said.

Banks were given a target of 20 per cent growth in disbursement and 15 per cent growth in accounts for the current financial year.

Reserve Bank of India Governor Raghuram Rajan had, earlier this month at the Delhi Economic Conclave, raised a red flag over the increase in non-performing assets in education loans and said such loans should be devised in a flexible manner, providing options like automatic moratorium if borrowers were under a period of unemployment. He wanted guidelines on know-your-customer (KYC) to be made easier.

“There are lots of NPAs in the education sector. They have been rising in the last few years. It's a matter of concern,” Mr. Rajan said.

A student, under the educational loan scheme, can borrow up to Rs.10 lakh for domestic education and Rs.20 lakh for studying in foreign colleges. Borrowers need not pay during the tenure of the course and for an additional year. The repayment period is five to seven years.

For loans up to Rs.4 lakh, banks cannot demand any collateral. According to bankers, the maximum number of bad loans are in this segment.

Due to rising bad loans, the finance ministry, at the request of bankers, has created a credit guarantee fund for education loans. The Ministry of Human Resources has transferred Rs.351.09 crore to the corpus fund and Rs.112.05 crore may be transferred in the next week, according to the Finance Ministry.

It has also asked banks to integrate with the Vidya Lakshmi portal – which is a first of its kind portal providing a single window for students to access information and submit applications for educational loans to banks and for government scholarships.

While 24 banks have registered, only eight have integrated their system with the portal for providing loan processing status to the students. “All the remaining banks are requested to take steps to integrate with the portal,” according to the note.

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