New Delhi: Banks are likely to reduce their interest rates in the coming quarters following the Reserve Bank of India’s (RBI) recent cumulative cut in policy rates, as per an SBI report. The RBI has slashed its repo rate by 50 basis points since February this year, prompting expectations of a transmission of these cuts by financial institutions.
The report highlights that after the RBI’s 25 basis point repo rate reduction in February, public sector banks lowered deposit rates by 6 basis points, while foreign banks cut rates by 15 basis points. In contrast, private banks increased their rates by 2 basis points. This analysis of the weighted average lending rate (WALR) for fresh loans versus the repo rate indicates that public sector banks and scheduled commercial banks (SCBs) tend to follow the adjustments in policy rates closely, ensuring a timely and effective transmission mechanism.
On the regulatory front, the RBI has taken steps to widen the options available for managing stressed assets. A new market-based framework for the securitization of distressed assets will be introduced, alongside the existing Asset Reconstruction Company (ARC) route under the SARFAESI Act of 2002. This move aims to provide more flexibility in managing non-performing assets (NPAs).
The report further notes that the current guidelines for co-lending arrangements between banks and non-banking financial companies (NBFCs) apply only to priority sector loans. While the co-lending model has proven beneficial for all parties involved, the report states that it remains under review. The potential expansion of co-lending to include all regulated entities is a positive development, but the full impact and scope of this move are yet to be determined.
The rise in gold loan portfolios, driven by increasing gold prices and market volatility, has prompted regulatory concerns, particularly regarding breaches of loan-to-value (LTV) limits. At present, different lenders, both regulated and unregulated, follow varying loan matrices for gold loans. The RBI plans to revisit and issue comprehensive guidelines to ensure prudential norms and conduct-related aspects for gold loans are harmonized across all entities.
The report also welcomed the RBI’s proposal to review regulations for partial credit enhancement (PCE), particularly in infrastructure financing. Current guidelines require capital for 100% of the bond amount, even though PCE can only be provided for up to 20% of the bond. A potential revision of capital requirements and an increase in exposure limits would make PCE more market-appropriate and help deepen the bond market.
In a separate move, the RBI has allowed the National Payments Corporation of India (NPCI) to revise transaction limits for UPI-based person-to-merchant (P2M) payments in response to growing user demand. However, peer-to-peer (P2P) transactions will remain capped at Rs 1 lakh. This adjustment is expected to enhance UPI payments for larger transactions, including tax payments.
The evolving global situation has called for policy flexibility, and the RBI’s proactive measures are seen as paving the way for more aggressive responses, should they be required during fiscal year 2026. The development and regulatory policies are considered routine but necessary to ensure financial stability amid emerging challenges, the SBI report concludes.
