Interest rate repo-market interest rate link diluted impact of RBI policy

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During the months of February and December 2019, the repo rate was lowered by 135 basis points from 6.5% to 5.15%.

Insufficient credit flow from commercial banks and non-bank financial corporations (NBFCs) to industry has often been cited as a major obstacle to growth. While the flow was reported to be less than needed, the cost of credit has also increased. The RBI, the main provider of credit, has recently tried to lower the repo rate in successive attempts.

During the months of February and December 2019, the repo rate was lowered by 135 basis points from 6.5% to 5.15%. However, the real lending rate of banks to end users did not reflect the same dynamism.

The market lending rate (base rate between 8.95-9.40%), fluctuating between 11.5% and 12%, decreased on average by only 44bp, the RBI not intervening in the market interest rate fixing by commercial banks. In favor of the banks, it can be argued that this partial deception was necessary to compensate the banks for the increasing cost of operations and services. As a result, the pass-through impact of the decline in the repo rate was much lower than expected. This phenomenon is not new in the Indian economy.

Previously, the reduction in excise duties on a specific product, in many cases, was not passed on proportionately to the end user with little impact on the price of the product, which was the fundamental intention of the company. lower excise duties.
It must be recognized that the weakening of the direct link between repo rate and market interest rate has somewhat diluted the impact of the RBI’s political intervention by lowering the cost of credit by households for the purchase of goods. real estate and consumer goods, including vehicles, and by SMEs and large players to reduce the cost of working capital and capacity building.

The latest data shows that the total non-food credits (measured by total outstanding loans) of programmed commercial banks increased by 8.3% in October 2019 compared to the previous year.

Food credit increased by around 27% compared to October 2019. On non-food credit, loans to industry at 27.9 lakh crore only increased by 3.4% during the period. Credit to the mining and steel sectors both declined. While for mining it is 4.1% lower, for iron and steel the credit stands at 2.68 lakh crore, which has fallen almost 7% from the last year. For other metals, outstanding loans fell by 7.7%.

On the other hand, auto credit, construction and roads, total infrastructure sectors, outstanding credit increased by 4-8%, which is substantial in the context of the crisis period current credit.

The above asymmetric distribution of bank loans between different industrial segments is explained by the fact that the metals sector is one of the largest in terms of total outstanding loans which have been declared as non-performing assets. Of the total APMs by metallurgical sector, the steel sector alone accounts for nearly 76%, which has made banks averse to credit for these sectors. Credit goes to the government for having introduced the Insolvency and Bankruptcy Code (IBC) with the appropriate modifications and making it an effective tool to recover overdue loans from failing units by selling them to new owners through through a transparent auction procedure. In the recent

In the case of Essar Steel, the emergence of ArcelorMittal (60%) and Nippon Steel (40%) as the successful bidder would bring good technology and best working practices, corresponding to international standards.

In addition to benefiting from healthy competition in the domestic market, this would help the growth of India’s steel exports. The resolution of outstanding bank loans by Bhusan Steel and Power and Usha Martin by Tata Steel by taking control of these two ailing units and the smooth resolution of loans and ownership of Monnet Ispat and Bhusan Steel by JSW Steel are glorious examples of great Indian steel players. consolidate and strengthen their positions as well as help the financial sector to emerge from the scourge of outstanding bank loans. These efforts are expected to go a long way in eliminating the risk aversion of commercial banks in granting credit to the steel sector.

Credit growth from banks to micro and small enterprises declined slightly by 1.4%, while for medium-sized enterprises it increased by 1.2% and for large players the rate of credit growth declined. found to be greater than 4%.

The sectoral breakdown of non-food credit reveals an interesting fact that loans to non-bank financial companies (under the service sector) at Rs 7.13 lakh crore increased by 27% in October 2019 compared to the previous year.

In the category of personal loans, the durable consumer goods sector has benefited from a credit extension of over 70% while the outstanding credit for the housing sector stands at 12.7 lakh crore, i.e. 19.4% more than last year and auto loans amount to Rs 2.07 lakh crore (5% more than last year).

The trend of sectoral growth and health influenced by appropriate policy interventions by the government would therefore continue to be the main determinants of credit flows to the sector.

DG, Institute of Steel Development and Growth

(Opinions expressed are personal)

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