Anticipated Interest Rate Reduction by Banks Following RBI's Repo Rate Decrease: SBI Analysis
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Synopsis
According to an SBI report, banks are expected to transmit the RBI's recent 50 basis points rate cut in the upcoming quarters. The report discusses various regulatory changes and their implications for financial stability.
Key Takeaways
- RBI cut rates by 50 basis points since February.
- Public sector banks reduced deposit rates by 6 basis points.
- New co-lending guidelines may expand to all regulated entities.
- RBI to reassess gold loan regulations and LTV norms.
- NPCI allowed to raise UPI transaction limits for P2M payments.
New Delhi, April 9 (NationPress) In light of the RBI’s 50 basis points aggregate reduction in policy rates since February of this year, banks are likely to implement the rate cut transmission in the upcoming quarters, as detailed in an SBI report.
The analysis highlights that after the RBI’s 25 basis point repo rate cut in February, public sector banks decreased deposit rates by 6 basis points, whereas foreign banks lowered rates by 15 basis points. Conversely, private banks raised rates by 2 basis points. The examination of the weighted average lending rate (WALR) for new loans compared to the repo rate indicates that WALR for public sector banks and scheduled commercial banks (SCBs) closely aligns with adjustments in the policy rate, demonstrating an effective and timely transmission mechanism.
The report further emphasizes that regarding regulatory and development policy, the RBI has opted to expand options for managing stressed assets. A new market-based framework for the securitisation of stressed assets is set to be established, along with the existing ARC route under the SARFAESI Act, 2002, providing enhanced flexibility in managing NPA.
Current co-lending guidelines apply only to agreements between banks and NBFCs for priority sector loans. While co-lending benefits all involved parties, the existing model is still under review. The anticipated extension of co-lending to all regulated entities is a positive development, yet precise details are necessary to assess the impact and scope of this new arrangement, according to the SBI report.
The report also indicates that the recent surge in the gold loan sector, combined with rising gold prices and market volatility, necessitates regulatory intervention due to concerns regarding loan-to-value limit breaches. Various lenders, both regulated and unregulated, currently adopt different loan matrices for Loan to Value (LTV), interest rates, and distribution channels. The RBI plans to reassess and issue comprehensive regulations on prudential norms and conduct-related aspects concerning gold loans.
The proposed assessment aims to harmonize and consolidate guidelines covering non-fund based facilities across all regulated entities, including a review of instructions on the issuance of partial credit enhancement (PCE). This move is anticipated to broaden funding sources for infrastructure financing, which is welcomed as it could facilitate such financing, as noted in the report.
This announcement follows similar measures outlined in the Union Budget. Current regulations governing the issuance of partial credit enhancement mandate capital for 100 percent of the bond amount, despite PCE being applicable to just 20 percent of the bond.
The institution providing PCE must also allocate a higher proportion of risk weightage for these instruments. The RBI's initiative could potentially lead to revisiting capital requirements and increasing exposure limits for PCE to enhance market suitability and deepen the bond market, as stated by the SBI report.
The RBI has authorized NPCI to increase transaction limits for UPI concerning person-to-merchant payments (P2M) in accordance with evolving user demands. However, P2P transactions on UPI will remain capped at Rs 1 lakh, as before. This change is expected to enhance UPI payments for larger transactions, such as tax payments.
Overall, the evolving global landscape necessitates policy agility to tackle emerging challenges. Today's policy adjustments reflect this need, and the current accommodations may lead to a more assertive policy response if required in FY26. While development and regulatory policies may seem routine, their connection to the emerging situation will ensure financial stability, the SBI report concluded.
