RBI guv says it's time other banks linked loans, deposits to repo rate

After over a dozen public sector banks, including State Bank, have voluntarily linked their loans and deposits pricing to the repo rate, Reserve Bank governor Shaktikanta Das on Monday (August 19) stressed on the need for the entire system switching to this model, saying such a moved can speed up the monetary transmission process.

While SBI was to first one to link its loans and deposits to the repo rate from May and home loans from July, six other peer banks like Bank of Baroda, Union Bank, and Canara Bank among others announced the same last week under which the asset side pricing has moved down fast. The move comes even as the regulator has decided not to push banks for this, considering their poor finances.

These six PSBs announced the switch-over after the last monetary policy wherein RBI lowered the repo rates by 35 bps to a nine-year low of 5.4 percent and has ruled out asking banks to do so saying “banks are just about coming out of the NPA mess and it seems that they need to be given more time to improve their finances.”

The process of shifting to an external benchmark on rates needs to be faster and our expectation is that they should move faster, Das told the annual banking conference organised by the industry lobby Ficci here this morning. “I think the time has now come to formalise this linking of new loans to external benchmarks like repo rate. We are monitoring this and will be initiating necessary steps,” Das said.

“We will definitely play our role as the regulator to work with banks, to see the trend in the market and take steps that will formalise these linking of new loans to the repo rate or to an external benchmark.” Das explained that the RBI has kept the external benchmarks in abeyance earlier because “we wanted to see how the market evolves. It is a positive trend to which banks have responded and are now linking their lending rates, especially the new loans, to the repo rate and other external benchmarks. But this process needs to be faster. Today, the economy requires a certain amount of push not just from the monetary policy but also from its transmission,” he said and expressed his optimism that more transmission will be faster.

Though he expressed his concern over the steady dip in growth, Das said a “mood of doom and gloom isn’t going to help anyone and what is important to look at the positives”, But he was also quick to add growth has become the highest priority for all, and that every policymaker is concerned with it. He also assured that liquidity will not be a deterrent for growth as he admitted that issues like the crisis at NBFCs, liquidity crisis for some critical sectors, and monetary transmission and banking reforms do affect business community as also the economy as a whole.

Noting that the global banking system as a whole is more resilient to cushion risks now, he said it is important to look at financial stability as this alone can ensure long
term growth.

Stating that the weaker-than-expected growth with signs of slowdown is the key risk to global financial stability today, the governor warned that headwinds to financial stability can emanate from payments, credit and external markets. Calling for radical corporate governance reforms in the nearly crippled state-run banks, Das said their real test is their ability to access capital from the markets rather than depending on the government.

Lauding the recent amendments to the bankruptcy laws, which have given primacy to financial creditors in the event of bankruptcy and the resultant resolution either through asset sale or liquidation over operational creditors, he said the latest amendments will help ring-fence the banking sector.