RBI monetary policyThe Reserve Bank of India continues to do its bit to cut interest rates. On August 7, the central bank cut repo rate — the interest rate at which RBI lends to banks — by 35 basis points and brought the repo rate to 5.40%. If the interest cuts are transmitted by banks, this should mean lower EMIs for loan borrowers. The RBI has also announced the lowering of credit risk weight for most personal loans, which is positive. This means there could be lower capital requirements. For retail banking customers, the RBI has announced round-the-clock availability of National Electronic Funds Transfer System (NEFT), which should mean the ability to transfer funds 24X7.

For investors in banking shares, this is mixed news because rate cuts may depress the net interest margin of the banks, but any increased demand can help counterbalance the negative effect. For investors in interest-rate sensitive sectors, a rate cut is almost always a positive development. After a brief spike, the markets settled flat in afternoon trade as comments by RBI on 50 bps rate cut being excessive were seen as a signal of rate-cutting cycle.

The real estate sector and its investors are excited about the RBI rate cut decision. They were expecting a 25 bps cut, just like the rest of the market, and have got 10 bps extra. The realty sector is in doldrums, and lower interest rates are — at least theoretically — supposed to boost demand for homes, lakhs of which await buyers across the country.

Let us have a detailed look at the key RBI measures. Read on.

Lower EMIs

With the RBI cutting repo rate by 35 bps (0.35%; 1 basis point is equal to 0.01%), means cheaper borrowing conditions. A slowing global economy, elevated trade tensions, and geopolitical uncertainty have contributed to bringing down the repo rates to the lowest in nine years at 5.4%. “At the face of it, this looks like exciting news for borrowers, who are expecting further cuts to the repo rate. However, the transmission of the repo rate cuts continues to be a concern. Between August 2018 and August 2019, while the repo rate has fallen by 110 basis points from 6.5% to 5.4%, the MCLR rates have more or less remained the same, or in some cases even marginally increased,” says Adhil Shetty, CEO, Bankbazaar, a loans marketplace.

The central bank is looking at several ways to increase the transmission of the rate cuts by the banks. Without transmission, my dear borrower, you will not get the benefit of lower interest rates. If you repaid loans at 9.1% before August 2018, the 110 bps rate cut means you could repay home loans at 8% today. This translates to a cut of Rs 1,740 cut in EMI for a Rs 25 lakh loan taken for 20 years tenure. The reality, however, is you are not getting the advantage of lower rates.

Plus, the RBI has announced a move to permit banks to lend to priority sectors including housing. Indirect priority sector lending through NBFCs are positive for Housing Finance Companies. Ravindra Sudhalkar, ED & CEO, Reliance Home Finance, says: “The Reserve Bank of India’s decision to cut rates by 35 basis point is a positive decision. The move to allow banks to lend to priority sectors, including to housing sector of up to Rs 20 lakh loans, through NBFC arms will kickstart credit flow, especially to the affordable housing sector. For the consumers to feel the benefit of lower rates, the RBI will now need to step in for accelerating the transmission of the rate cut.”

Shishir Baijal, Chairman & Managing Director, Knight Frank India, feels that in light of the present economic distress in the country, “we welcome the move to bring down REPO rate by 35 bps, however, we would have really expected to see a more substantial cut which is the need of the hour for its effective transmission to end-users”. While it is the fourth consecutive rate cut this year and is in line with RBI’s recent shift to an accommodative monetary policy stance, it may not be sufficient to give the required impetus to the stalling consumption numbers, he argued.

Ramesh Nair, CEO & Country Head, JLL India, also said that the growth trajectory of the real estate sector ultimately depends on the successive transmission of rate cuts to the end consumers.

SBI cuts MCLR in response

The country’s largest bank State Bank of India (SBI) has responded positively to RBI cutting lending rates. SBI today announced a reduction in its MCLR or marginal cost of fund-based lending rate, by 15 basis points across all tenors. The revised rates will be effective from 10 August 2019.

The one-year MCLR comes down to 8.25% per annum, from 8.40% annum. This is the fourth consecutive cut in MCLR in FY 2019-20 by the bank, SBI said.

MCLR is an internal benchmark rate used by banks to fix the interest rate on floating rate loans. It is the minimum interest rate, below which a bank is usually not permitted to lend. Lower MCLR mean borrowers like you will have to pay less on your loans and mortgages.

Lower risk weight for personal loans

Under the standardised approach for Credit Risk Management, consumer credit, including personal loans and credit card receivables attract a higher risk weight of 125% or higher, if warranted by the external rating of the counter-party. On a review, the BI has decided to reduce the risk weight for consumer credit, including personal loans, but excluding credit card receivables, to 100%. Lowering of credit risk weight for most personal loans are positive for banks with large personal loan portfolios, says Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares & Stock Brokers.

The decision to reduce risk weight for consumer credit (excluding credit cards) from 125% to 100% can contribute to increasing the liquidity for banks and bringing down the lending rates. Nevertheless, it still remains to be seen how much this measure will help the banks pass on the lower rates on credit products to its borrowers, points out Shetty.

We must tell you that lowering of credit risk weight on personal loans may have a different effect too. The RBI moves can be credit negative for banks because lower capital requirements will weaken banks’ protection from the personal loan sector, which has grown rapidly in recent years. This will encourage greater lending, but personal loans are unsecured and if the economic slowdown persists, personal loan repayments would be affected.

24X7 NEFT payments, Bharat Bill wider biller network

The RBI has done a good thing by allowing NEFT to become 24X7. The IMPS route is already 24X7, but some banks have limitations on IMPS amounts sent. The NEFT allows customers to send bigger amounts compared to IMPS. By making NEFT 24X7, this will help people send money urgently. At present, the National Electronic Funds Transfer (NEFT) payment system operated by the Reserve Bank as a retail payment system is available for customers from 8.00 am to 7.00 pm on all working days of the week (except 2nd and 4th Saturdays of the month).

As mentioned in the Payment System Vision 2021 document, the Reserve Bank will make available the NEFT system on a 24×7 basis from December 2019. This is expected to revolutionise the retail payments system of the country.

Apart from NEFT, the payments sector has another good piece of news. The Bharat Bill Payment System (BBPS), an interoperable platform for repetitive bill payments, currently covers five segments viz., (i) direct-to-home (DTH); (ii) electricity; (iii) gas; (iv) telecom; and (v) water bills. In order to leverage the advantages of the BBPS and harness its full potential, the RBI has now decided to permit all categories of billers (except prepaid recharges) who provide for recurring bill payments to participate in BBPS on a voluntary basis.

Apart from digitization of cash-based bill payments, these segments would also benefit from the standardized bill payment experience for customers, centralized customer grievance redressal mechanism, prescribed customer convenience fee and the like. Detailed instructions in this regard will be issued by the end of September 2019.

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. Kumar is a financial journalist, with a functional experience of 15 years. He tracks mutual funds, insurance, pension, PMS, fixed income/debt and alternative investments markets closely. He has worked for The Times of India, The Hindu Business Line, Deccan Chronicle Group, DNA, and Value Research, among others, across different cities in India. He is deeply interested in marrying data insights with actionable opinion. He can be contacted at kumarsroy@rupeeiq.com.