📊 *SAVE THIS FOR YOUR INTERVIEW!* 🔖📝 *RBI cut rates by 50bps in the recent MPC meet.* *Question:* What impact does it have on banks? *Answer:* Banks will have to lower the rate of interest on loans. *Question:* So what? *Answer:* The loans that banks give are majorly of three types ✓External Benchmark Linked(EBR): Repo Linked Loans ✓Internal Benchmark Linked (IBR): MCLR (Marginal Cost of Lending Rate) Linked Loans ✓ Fixed Rate Loans If the repo rate drops, the interest that banks get from EBR linked loans also reduces. *Question:* Why would it particularly impact banks? *Answer:* Around 50% of the loans given by banks are EBR linked. *Question:* And to whom these loans are given? *Answer:* Mostly retail loans to individuals. *Question:* What about loans given to corporates? *Answer:* Most of it are IBR Linked Loans. IBR doesn't change as fast as EBR linked loans. *Question:* Then the bank shouldn't have such a major impact, right? As the interest received on corporate loans won't fall much. *Answer:* Corporate loan offtake is very low due to the subdued economic activity and the fact that there's overcapacity so corporates don't want to undertake capex. Corporates will undertake capex if demand picks up meaningfully. *Question:* Any impact on bond markets? *Answer:* Bond yields have fallen and those corporates who are taking loans are resorting to bond markets as yields have fallen by ~92 bps on AAA rated bonds. This further hurts banks. *Question:* What about the CRR(Cash Reserve Ratio) cut from 4% to 3%? *Answer:* Banks were required to keep 4% of Net Demand and Time deposits with RBI, which earned NO INTEREST. Now that 1% has been freed up, this could be invested by banks in interest earning assets, thus supporting their Net Interest Margins (Difference between interest income and interest expense) *Question:* Why are investors still hopeful on the banking sector? Answer: With lower interest rates, banks are expected to play on volume by giving out more loans as there's surplus liquidity in the banking system. *Question:* Why can't banks cut the savings account rate and FD rates if they themselves are getting low interest on their loans? *Answer:* The banks have done that and will do it but can't do so beyond a point as that would discourage the depositors from keeping money in bank accounts and banks have already been scrambling for low cost deposits. Interesting times ahead. Let's see how the situation pans out and what could be the impact on banks. Banking is a sector which keeps the wheels of the economy moving, so all eyes on it. *Liked* the post ❤️ *Repost* ♻️ for the benefit of your network and feel free to share your thoughts in the comments. *Follow The Channel as I keep sharing insights on finance and Capital Market.*