MSME Loans Lead Fresh Lending Rate Cuts During Easing Cycle: RBI Study

New Delhi, Oct 26 (KNN) Indian banks pass on repo rate hikes to borrowers more fully than rate cuts, according to a Reserve Bank of India (RBI) study published in its Bulletin.

Between March 2022 and January 2025, banks transmitted 76.4 per cent of a 250-basis-point repo rate hike through contractual repricing, raising lending rates by 191 basis points.

During the easing cycle from February 2025 to March 2026, banks passed on 64 per cent of a 125-basis-point repo rate cut, reducing lending rates by 80 basis points.

WALR Reflects Both Pricing And Credit Composition

The study, titled ‘Transmission to Lending Rates of SCBs: Price versus Composition Effects in WALR’, examines how the weighted average lending rate (WALR) reflects both loan repricing and changes in banks’ loan portfolios.

Based on headline WALR, the difference in monetary policy transmission between tightening and easing cycles narrowed significantly. A 250-basis-point repo rate hike raised WALR by 181 basis points, while a 125-basis-point cut reduced it by 93 basis points.

WALR-based transmission stood at 72.4 per cent during tightening and 74.4 per cent during easing, compared with a wider gap under contractual repricing, reported The Times Of India.

Banks Adjust Spreads During Easing Cycles

Researchers said banks may protect their net interest margins (NIMs) during rate-easing cycles by widening spreads or shifting lending towards higher-yielding loans, limiting the pass-through of policy rate cuts to borrowers.

Fresh lending rates rose by 12 basis points in March 2026 despite monetary easing, highlighting the influence of banks’ pricing decisions and changes in credit composition.

The findings show that headline lending rates may not fully reflect monetary policy changes, as shifts in loan portfolios can offset or amplify the impact of contractual repricing.

MSME Loans Drive Fresh Lending Rate Transmission

MSME loans contributed the most to the decline in the weighted average lending rate (WALR) on fresh loans during the February 2025–March 2026 rate-easing cycle.

Fresh MSME loan rates fell by 122 basis points, broadly in line with the 125-basis-point repo rate cut. Benchmark-linked repricing accounted for 118 basis points of the decline, reducing the overall WALR by 24 basis points, more than 2.6 times the contribution of any other sector.

Education loan rates recorded the steepest fall at 162 basis points, but their impact on overall WALR was negligible due to their small share in total credit. 

Rupee export credit rates declined by 161 basis points, contributing five basis points to the overall reduction, while rates for large industries fell by 67 basis points, contributing nine basis points.

The decline was partly offset by a positive weight effect of nine basis points, reflecting a shift towards loans or lenders with higher spreads.

(KNN Bureau)