Finance minister Nirmala Sitharaman on Friday announced an upfront capital infusion of Rs 70,000 crore in state-run banks that will boost their lending capacity in the market by Rs 5 lakh crore.

The finance minister said banks have decided to pass on the RBI’s rate cut benefits to borrowers through MCLR reduction, which would make home, auto and other loans cheaper.

While the RBI has cut rates by a total 105 basis points since February, the passthrough has been less than desirable, forcing even RBI governor Shaktikanta Das to seek help from banks to boost growth. Till now, banks generally lagged in transmitting the RBI’s reduction in repo rates to borrowers. Before the last reduction earlier this month of 35 basis points, banks on an average had passed only 29 basis points out of the 75-basis-point cut effected during 2019.

FIEO president Sharad Kumar Saraf said, “Recapitalising of banks by Rs 70,000 crore upfront as additional lending and liquidity along with banks being asked to pass on the rate cuts through MCLR reduction to further make Rs 5 lakh crore available for credit expansion will help to create liquidity in the system.”

“Banks have again decided to launch repo rate or external benchmarking linked loan products. This will, therefore, result in reduced EMI for housing loans, vehicle and other retail loans by directly linking repo rate to the interest rates,” Sitharaman said.

Aid for housing finance firms

The minister also announced additional liquidity support of Rs 20,000 crore to housing finance companies (HFCs) by the National Housing Bank, thereby increasing the total support to Rs 30,000 crore.

She announced a partial credit scheme for the purchase of pooled assets of non-banking finance companies and HFCs up to Rs 1 lakh crore to be monitored at the highest level in each bank.

Aadhaar KYC in mutual funds

According to Sitharaman, relevant changes will be made to allow mutual fund investments through Aadhaar-based know your customer (KYC) route.

Industry players said implementation of Aadhaar-based KYC can revive the growth of the Rs 24-trillion mutual fund industry. “This will lead to ease of investment and help the industry to deepen the penetration levels. It can possibly be the biggest reform the industry has seen in recent years,” said Swarup Mohanty, chief executive officer of Mirae AMC.