Mumbai: A rate cut by the Reserve Bank of India is not a "panacea" for pushing up low credit growth and banks are unlikely to transmit any of the cuts to their loan pricing, stated Singaporean brokerage DBS Bank. "Rate cuts are unlikely to be a panacea for credit activity, even if a handful of banks jump into the easing bandwagon this week," DBS said in a note. The brokerage said it expects cuts of 0.50 per cent in the repo rate by RBI by June.
Following the surprise 0.25 per cent cut in the repo rate by RBI last week, only two state-run lenders have responded with a cut in their base rates while some others are expected to have a review this week, it added. Generally, a cut in deposit rates precedes a cut in the lending rates, it said, adding that some banks had started cutting their rates over six months back but have not transmitted this to their lending rates.
"Any bunched-up cut in the lending rate is likely to be smaller than the repo cut, thereby posing downward rigidity," it said. For the credit growth in the system as a whole, it said banks will adopt a cautious stance on lending due to asset quality concerns and also higher provisions. Even though there is a lot of upbeat in the sentiment, it is yet to push up lending activity among the banks. Lenders have done a combination of both cutting their deposit rates to avoid accumulation of high funds and in some cases, have also cut lending rates.
Additionally, availability of cheaper finance through instruments like corporate bonds and commercial paper for working capital and short term funding needs, is also likely to compress the credit growth in the system, it said.
