Lower Lending Rates To Cushion Note Ban, Expect 50-75 Basis Point Cut: BofA Merrill Lynch
BofA expects banks to cut MCLR by 50-75 bps in the April-September period.
More banks are likely to reduce their lending rates this year in the aftermath of currency crackdown and Prime Minister Narendra Modi’s speech on Saturday to support the poor and the middle class, Bank of America Merrill Lynch wrote in a report.
Banks are expected to bring down lending rates by 50-75 basis points in April-September if the Reserve Bank injects liquidity worth Rs 2,20,000 crore through open market operations, the global financial major said.
An open market operation is a market operation conducted by RBI by way of sale or purchase of government securities to or from the market with an objective to adjust rupee liquidity conditions on a durable basis.
According to Bank of America Merrill Lynch, lower lending rates will cushion the hit from the demonetisation shock in the second half of 2017.
The demonetisation of old Rs 500 and Rs 1,000 currency notes has resulted in a surge in bank deposits as withdrawals are restricted and black cash money is switching to the banking channel, the brokerage said.
The country’s largest lender State Bank of India reduced its lending rate by 90 basis points. Union Bank of India also cut its one-year benchmark MCLR to 8.65 percent from 9.30 percent while Punjab National Bank cut its MCLR by 70 basis points.
Among private lenders, Kotak Mahindra Bank has cut its one-year MCLR by 20 basis points to 9 percent.
MCLR is the benchmark lending rate at which the bank prices its loans.
According to data released by the Reserve Bank of India, banks have reported exchange and deposits amounting to Rs 8.45 lakh crore between November 10 and November 27. Of this, exchange amounted to Rs 33,948 crore while deposits amounted to Rs 8.11 lakh crore.
In a bid to support growth, Modi in his address to the nation on New Year’s eve announced a series of incentives to farmers, women and small businesses, and defended his recent decision to abolish high-denomination bank notes.
Banks, so far, have pared their marginal cost of funds based lending rates which is the cost to the new borrower, BofA Merrill Lynch said.
Lower lending rates could increase credit growth and spark a revival in private investments.
Also Read: Modi Offers Subsidies for India’s Farmer as Cash Shortage Bites
