Mumbai: One of the important challenges for India`s incoming central bank chief is a problem he and his predecessor have long encounter with – how to prompt stubborn state banks to cut borrowing costs more aggressively to boost the economy.
Supporting Raghuram Rajan, the Reserve Bank of India (RBI) has cut lending rates by 150 basis points (bps) since early last year, still banks have only lowered their rates by around half that and say they can only manage another 10-15 bps extra in coming months.
Urjit Patel, Rajan`s lieutenant at the RBI who has now been named his successor, knows well that the banks` reluctance is tempering transmission of monetary policy into the broader economy, even as the window of opportunity for even greater easing may be closing.
In his last days in office, Rajan is expected to make twist to the supposed marginal cost-based lending rates (MCLR) he had unveiled in April, which attempted to force lenders to more rapidly reflect redesign in deposit and market rates.
That measure has largely failed as bankers responded by jacking up the risk surcharge they assigned to new loans to avoid cutting lending rates.
Bankers say any further changes are unlikely to have plenty of an impact given the RBI cannot unilaterally force banks to lower lending rates.
The government has also been reluctant to walk in. While Prime Minister Narendra Modi`s administration is keen to see lower rates which could recover corporate investment, it has come out unwilling to pressure state-owned banks because of the potential impact on profits.