RBI Cuts Repo Rate and This is How it Impacts Digital Lenders

During the last few months, liquidity has been a long-lasting issue hindering growth in the Indian business ecosystem and all thanks to the IL&FS crisis.

However, in welcoming the move, after assessing the macroeconomic condition in the country, led by RBI newly appointed governor Shaktikanta Das, the Monetary Policy Committee today reduced the policy repo rate under by 25 basis points from 6.5 per cent to 6.25 per cent.

While the move is intended to pump domestic consumption in the country and is expected will have a direct impact on the banking and real estate sector, Entrepreneur India evaluates how the change in repo rate is good news for digital lenders.

The Impact

The recent monetary policy by RBI will certainly have a positive impact on the overall financial market in India and digital lenders will surely enjoy its benefits.

Piyush Khaitan (PK), Founder & MD, NeoGrowth says the 10-year G-Sec yield has already come down by 54 bps in last two months, however, the industry hasn't seen any transmission of that into corporate bonds.

"Now with the repo rate cut of 25 bps, we expect to see even the corporate bond yields coming down. This should help all the NBFCs and borrowers to borrow from the market at a cheaper cost of funds. This should also help most of the NBFCs to reduce their interest cost which has gone up by 130 to 150 bps. This is the major outcome of this monetary policy," he added.

Additionally, the apex bank also changed its monetary policy stance from "calibrated tightening to neutral", which was applauded by the digital lenders.

Piyush Bothra, CFO, Square Capital says this provides growth impetus to trade and commerce in the country and strengthen the financial sector, particularly the banks and NBFCs including the digital lenders.

"RBI's repo rate cut today will bring down the cost of capital for the banks that have been reeling under a lot of stress lately. This will have a cascading effect on various industries which will be able to borrow the necessary funds at lower rates for expansion and growth. From the consumers' point of view, there will hopefully be a reduction on their EMI burden on loans. However, it remains to be seen how quickly and what quantum of reduction is passed on by the commercial banks to the consumers," he noted.

Having said that the alternate lenders work outside the formal banking system and hence, the will faster in reflecting the rate cut in their lending processes.

What Next

While announcing the fifth bi-monthly monetary policy statement in December 2018, the central bank proposed all new floating rate for personal, or retail loans, and floating rate loans to micro and small enterprises extended by banks based on external benchmarks. This would be effective from April 1, 2019.

The external benchmarks are policy repo rate, 91-day Treasury Bill yield,182-day Treasury Bill yield, any other benchmark market interest rate produced by the Financial Benchmarks India Private Ltd.

Adhil Shetty, CEO, BankBazaar says banks will have the option of using one of the four recommended external benchmarks to determine the interest rates while disbursing new floating loans.

"This will mean a change in the credit policies of several lenders and even several credit products by the same lenders. The final guidelines regarding the same are yet to be released by the apex bank. We hope to receive those guidelines soon enough so that we can help customers access the right financial products at the right time to fulfil their aspirations," he noted.