Despite the Reserve Bank making credit cheaper, lending rates are rising for borrowers after accounting for inflation and falling economic growth, a foreign brokerage has said.
- The weighted average lending rate in the system is up 0.08 per cent since April, economists at Bank of America Merrill Lynch said in a report.
- Economic growth has fallen to a six-year-low of 5 per cent in the June quarter and is widely expected to slip further with almost all key components of the economy contracting or falling since the first three months. The RBIhas responded by cutting rates by 110 basis to a nine-year-low of 5.40 per cent since April courtesy low inflation.
- The RBI has been blaming banks for slower transmission of its policy moves into their lending rates and continuously nudging them to cut more, so that credit pick up can increase to help the broader growth. It has also helped make adequate liquidity available.
- “Growth is still falling as real lending rates are still rising,” the brokerage report said. Real lending rate is the number after calculating for inflation.
- In their note, the analysts said the weighted average lending rate, which is the aggregate of the interest paid on all the debt, is up because of higher money supply and credit demand are unable to ensure banks reduction in marginal cost of funding based lending rates, which are typically applicable for new loans.
- Among the solutions to push growth up, the report said the monetary authority and the finance ministry will have to pull down average lending rates through measures like starting a 2 percentage points loan subvention done to small businesses, which would cost Rs 21,100 crore next fiscal year and also a reduction in the cash reserve ratio by 0.25 per cent by the RBI in February.
- It also reiterated its call for a 0.25 per cent cut in the key rates in the December policy, which will be followed by a 0.15 per cent cut in February.