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Perhaps small is more beautiful than big! A development bank for BRICS Smart banking in smart cities Growing volume of stressed assets… Banking in Telangana What is the priority – mergers or NPA reduction? Needed a Banking Atlas Why any time money? Emerging crisis Merger mania haunts banks Small finance banks offer high interest rates Governance in Reverse Gear? Bank deposits account for 46.3 per cent of household savings Fund healthcare clinics in villages... Managing NPAs... From lazy banking to easy banking Two banks: their jubilees and performances Big bank merger, bigger expectations A bank for women, by women Rationalised Stage set for Indian ‘avatar’ of foreign banks Indian customers are tech savvy The collaboration suite of cyber criminals Payment banks have arrived It’s a war on black money, support it. Reaching out: is it slowing down? Ferrying digital banking to Lakshadweep Greet Lakshmi the banking robot Grows Bigger Financial inclusion vs unclaimed deposits Insatiable appetite for credit Hesitancy in announcing year-end results A new development bank rising in the east… Drop in SLR- sparing lendable resources Too big to fail and too small to sail Cradle of banks to a smart city... Monetary policy continues to adopt dis-inflationary path Anytime banking to anywhere banking Banking on Risk Drastic decline in asset quality Small finance payment banks... One down in private sector Why priority status? Banking overhauling or reorganisation? Small is ‘more’ beautiful The paradox: clamour for the Goliath and David How ‘secure’ are the secured loans? Lacklustre credit expansion Ernakulam excels... Another route for achieving financial inclusion Who is the real beneficiary? New bank licences, at last... Cautious and considerate Capital base of regional rural banks raised Mega merger is on Nothing much can happen…. All that glitters is not gold... Cut in repo rate – lower than expected Just 660 days! Target over-ambitious... Good, bad and ugly Well-lived... Reaching the Unreached… How okay are new banks? Targets continue to be ad hoc LVB- A supermarket of financial services Growing gainfully Bottomlines shrink, bad loans rise... Thirty more cities seek to become SMART United India Insurance - Rs 110 crore losses have been claimed till now due to floods in Tamil Nadu New capitals of Migrant banks Holy or unholy? Aadhaar, niraadhaar and banking
 
Cautious and considerate
The Fourth Monthly Statement: 2016-17 of the Reserve Bank of India’s Monetary Policy Committee (MPC), released last month has reduced the Repo rate by 25 basis points, as eagerly awaited by the financial sector.

This decision was taken by the Monetary Policy Committee, headed by the governor of Reserve Bank. This is the first policy announcement made by Urjit Patel, the new boss.  “The decision of the MPC” asserted the Committee, “ is in consonance with the objective of achieving consumer price index (CPI) inflation at 5 per cent by Q4 of 2016-17 and the medium-term target of 4 per cent.” The repo rate now stands at 6.25 per cent. The Bank Rate remains at 6.75 per cent, since April 2016, when it was reduced from the level of 7.00 per cent.

 

Cautious approach...

As against the exaggerated expectation of a higher reduction, a modest reduction of 25 basis points has been announced. This cautious approach has been explained in the Report: “the Committee took note of potential cost push pressures that may emerge, including the 7th Pay Commission Award on house rent allowances and the increase in minimum wages with possible spillovers through minimum support prices. The fuller play of these factors will need vigilance to prevent a generalised cost spiral from taking root.” 

The changing contours of inflationary trends in the recent period have also been explained in the Report: “retail inflation had been elevated by a sharp pick-up in the momentum of food inflation overwhelming favourable base effects during April-July. In August, the momentum of food inflation turned negative and surprised expectations; consequently, base effects in that month came into full play and pulled down headline inflation to an intra-year low. Fuel inflation has moderated through the year. Inflation excluding food and fuel has been sticky around 5 per cent, mainly in respect to education, medical and personal care services. Households reacted to the recent hardening of food inflation adaptively and raised their inflation expectations in the September 2016. Input costs in the manufacturing sector have firmed up slightly as evident in various surveys, but the presence of considerable slack has restrained their transmission into corporate pricing power.” The RBI’s assessment of the changes in the price situation is realistic.

 

Implications for banking sector...

The general expectation of bank borrowers is a reduction in the lending rates. In the recent past, bankers were reluctant to lend extensively to this sector as perceived by the builders. This situation was created by the decline in the loan repayment schedules. The enlarged inventories of unsold housing units with the builders have emerged as a cause of concern to the bankers. Contrary to common belief, the housing finance has increased, despite this problem, as the published data reveal. Advances to the housing sector have increased by 20 per cent, going up from Rs.6285 billion to Rs.7648 billion by March 2016. Aspiring borrowers of housing loans may have to wait until the banks are able to reduce the volume of non-performing assets in this sector.

It may be unrealistic for the bank customers to expect a reduction in the lending rates immediately. Between 15 January, 2015 and 15 April, 2016, the repo rate has been reduced by 150 basis points. In response, banks have lowered their benchmark lending rates by only 60 basis points. Banks have to calculate the impact of reduction in the lending rates on their bottom lines. A couple of banks, however, have made heroic announcements of reducing their rate of interest for fresh borrowings.  If banks have to reduce their lending rates, they have to reduce the deposit rates also, to maintain the interest margin and the cost of funds. But they cannot afford to reduce deposit rates, when bank deposits are slowly losing the preferences of the investors, because of the emergence of more lucrative investment avenues.

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