Related to : GS Paper-3

Ans :

Introduction-
Flush with funds thanks to demonetisation, other banks, including private ones, might follow suit soon. Economic affairs secretary Shaktikanta Das tweeted, “Trend of interest rate reduction follows demonetisation. Banks have substantial quantum of low-cost funds now.”

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.
• Banks adopted MCLR as their new benchmark lending rate in 2016(all new loans sanctioned on or after April 1, 2016 will be linked to MCLR.), in lieu of the base rate system, for new borrowers.
• MCLR to be linked to fresh (incremental) cost of borrowing.

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.