Reserve Bank of India Study Finds Loan Composition Lowers Lending Rates
The Reserve Bank of India reports that shifts in loan composition can decrease overall borrowing costs even without official policy rate cuts.
A study published in the October Bulletin of the Reserve Bank of India reveals that bank lending rates can decrease independently of policy rate cuts. The research, titled "Transmission to Lending Rates of SCBs: Price versus Composition Effects in WALR," explains that the weighted average lending rate is driven by both the specific interest rates charged and the composition of loans disbursed.
Findings indicate that shifts in credit distribution toward high-rated borrowers, specific sectors, or particular banks can lower the overall cost of borrowing. This trend is especially prominent at the start of a new financial year. For instance, a moderation in the weighted average lending rate for fresh loans in June was attributed to the normalization of loan composition rather than targeted rate cuts.
The study warns that these composition effects can distort the perceived effectiveness of monetary policy. A decline in the aggregate lending rate does not necessarily mean banks have reduced rates for individual borrowers, but rather that the mix of loans has shifted.
