Big businesses may take longer to get benefit of rate cut

The recent policy rate cut by India's central bank should turn out to be good news for individuals and small businesses.

- Shayan Ghosh

The recent policy rate cut by India's central bank should turn out to be good news for individuals and small businesses. However, large corporates hoping for relief on interest payments will have to hold the bubbly as banks dither on cutting lending rates for such borrowers, and wait for key internal committees to take a call.

The development comes on the back of the first repo rate cut this month by the Reserve Bank of India (RBI) in five years—of 25 basis points (bps)—and the central government's reported hawk-eye on banks to follow suit on their own lending rates. (One basis point is one-hundredth of a percentage point.)

One big reason for the hesitation to cut deposit rates (a precursor to a lending rate cut) is the potential outflow of money at a time credit growth is expected to pick up. "There is a challenge for banks because the repo rate cut of 25 bps will anyway hit net interest margin (NIM) and net interest income (NII)," said Ashok Chandra, chief executive ofaction on this front.

Banks give out loans to industry based on a benchmark called marginal cost of funds or MCLR, which is an internal metric that is linked to their deposit rates.