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Q. Cut in MCLR: Comment on SBI’s decision to cut its marginal cost of funds based lending rate (MCLR).
Jan 04, 2017 Related to : GS Paper-3

Ans :

Introduction-

Recently the State Bank of India (SBI) has reduced its marginal cost of funds based lending rate (MCLR) by a whopping 90 basis points. SBI’s move to slash lending rate will boost borrowers, especially given the sharp slowdown in credit growth in the current fiscal year. The has huge funds held in current and savings account deposits following the Centre’s decision to withdraw high-value banknotes and impose withdrawal curbs on account-holders.

Impact and Analysis-

  • Resent Reserve Bank of India’s report shows that growth in bank credit decelerated to 1.2% in current financial period compared to 6.2% pace witnessed in the comparable period in 2015.
  • Whereas deposits growth is almost doubled in pace, accelerating from 7.1% in the same period in 2015 to 13.6% cent in 2016.  
  • In this background banks liability has been jumped, where as their assets have almost stagnated.
  • Currently demand for cash across all sectors of economy is very high in the wake of the resultant cash crunch due to demonetisation.
  • The demonetisation decision has willy-nilly ended up providing banks with the windfall of low-cost deposits that could potentially serve as the launch pad to a credit-backed demand stimulus in the economy.
  • Now, other banks also bound cut their lending rates in order to capitalise the demand and to invest the money collected due to demonetisation.  
  • It will provide huge credit to economy that has potential stimuli reinvigorate flagging economic growth.


Conclusion-

The SBI’s decision to cut the lending rates came timely, which will boost borrowers which were faced credit crunch in current fiscal. Banks have collected huge money due to demonetisation process and now they can capitalise market by lending it at reduced rate, which in turn spur the economic growth of the country.   

 

 


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