A nudge to borrowers

A nudge to borrowers

The State Bank of India’s decision to cut its marginal cost of funds based lending rate (MCLR) by 90 basis points is a timely nudge to borrowers, especially given the sharp slowdown in credit growth in the current fiscal year. The timing of the cut is not surprising, given that the country’s largest commercial lender is awash with funds held in current and savings account (CASA) deposits following the Centre’s decision to withdraw high-value banknotes and impose withdrawal curbs on account-holders. With demand across sectors having taken a knock in the wake of the resultant cash crunch, the SBI’s decision to reduce borrowing costs is likely to spur some credit-fuelled buying including in sectors such as automobiles. Latest data from the Reserve Bank of India show that growth in bank credit decelerated to 1.2 per cent in the April 1-December 9, 2016 period, compared with the 6.2 per cent pace witnessed in the comparable period in 2015. Deposit growth, on the other hand, almost doubled in pace, accelerating from 7.1 per cent in the same period in 2015 to 13.6 per cent in 2016. Banks have thus found themselves in an unenviable situation where their liabilities (the money they owe depositors) have jumped sharply, while their assets (the loans they give) have instead almost stagnated. This has added to their woes at a time when mounting bad loans have pushed most public sector banks to post record quarterly losses. The demonetisation decision has willy-nilly ended up providing banks with the windfall of low-cost deposits that could potentially serve as the launch pad to a credit-backed demand stimulus in the economy.

Other banks have also cut lending rates, and lenders are now vying with each other to innovatively structure credit products, including home loans, in a bid to capitalise on what they hope will be an enduring revival in the appetite for borrowing. Still, the constraint of needing to fund the substantially higher interest commitments on deposits that have swelled the bank’s liabilities have also forced the SBI to raise the spread it applies on home loans — the additional markup interest it charges over the benchmark one-year MCLR — to a minimum of 50 basis points from 25 basis points earlier. The question is whether this reduction in borrowing costs will be enough to restore consumer confidence. With the Union budget less than a month away, the coming weeks could well serve to provide clear signals on the potential need for a fiscal stimulus to reinvigorate flagging economic growth, especially if a revival in credit growth is going to be slower than anticipated.