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Lending by Indian banks picked up some pace in June after the Reserve Bank of India’s (RBI) surprise 50-basis-point (bps) rate cut early in the month was fully passed on to borrowers, according to latest data from the Indian central bank.
As per data released on Thursday by the RBI, new loans given by Indian banks in June were priced 58 bps cheaper compared to May at 8.62 per cent on a weighted average basis, indicating the RBI’s larger-than-expected interest rate cut — which saw the Monetary Policy Committee (MPC) bring down the policy repo rate to 5.5 per cent on June 6 — was passed on, or transmitted, completely to prospective borrowers.
The transmission of the June rate cut was far greater than in previous months. In the current easing cycle, the MPC first cut interest rates in February, bringing down the repo rate by 25 bps to 6.25 per cent. This was followed by another similar cut in April. However, in response to that cumulative 50 bps reduction in the policy rate, banks reduced the weighted average lending rate on new loans by just 13 bps — from 9.33 per cent in January to 9.2 per cent in May — despite the central bank infusing record amounts of liquidity to help lubricate the monetary transmission.
The passage of reduced policy rates to borrowers has been a key concern for policymakers. In an interview to The Indian Express in late June, Nagesh Kumar – one of the three external members on the RBI’s MPC – had said transmission of the 25 bps rate cuts had been “a bit slow”. Two weeks later, Confederation of Indian Industry President Rajiv Memani told this paper the RBI had done its job and that availability of capital was not an issue for industry anymore.
The reduction in banks’ lending rates has seemingly found some takers, with separate data released by the RBI on Thursday showing credit growth picked up some pace in June as loans given rose 10.4 per cent year-on-year (YoY) as on June 27, after excluding the impact of the July 2023 merger between HDFC Bank and Housing Development Finance Corporation. At 10.4 per cent, the latest loan growth figure is higher than the 9.9 per cent recorded at the end of May. In their monthly State of the Economy article, published on July 23, RBI economists had noted that the rise in credit growth to 10.4 per cent was primarily due to a “strong momentum effect”.
To be sure, at 13.9 per cent, loan growth was higher in June 2024. Furthermore, policymakers will want to see durable signs of loan growth picking up. However, credit growth by banks has been steadily weakening since November 2023, when it stood at 17.8 per cent, after the RBI clamped down heavily on personal loans extended by banks and non-banks on concerns that the boom in this segment, particularly in unsecured loans, was unsustainable.
The slide in loan growth has coincided with a highly volatile global environment, which adversely impacts investment plans of the private sector — and in turn, their borrowing decisions. These concerns came to a head in May, when credit growth slipped below 10 per cent for the first time since March 2022.
Non-food credit, meanwhile, was up 10.2 per cent as on June 27, compared to 9.8 per cent at the end of May and 13.8 per cent in June 2024.
As per the RBI’s latest sectoral data, lending to micro and small enterprises as well as individuals was robust. As on June 27, loans extended by banks to micro and small enterprises were up 19.3 per cent YoY compared to a growth of 13.7 per cent as on May 30 and 11 per cent in June 2024. This helped push up total loans to industry — which also include medium and larger enterprises — by 5.5 per cent, up from 4.9 per cent in May but lower than 7.7 per cent a year ago.
Personal loan growth also picked up to 14.7 per cent YoY from 13.7 per cent at the end of May and wasn’t too far off from the year ago growth rate of 16.6 per cent, driven by vehicle, housing, and unsecured loans.
