Most banks say benefit of rate cut to show up after 3 months

Tags: Banking

Claim lower rates possible only when cost of funds declines

Several private and public sector banks that have not cut lending rates despite the reduction in key rates last week by the Reserve Bank of India (RBI) said they would be able to cut rates only when their cost of funds come down – which could take three months. So far, only a handful of public sector banks have cut lending rates, while the bigger players have either stayed away from any reduction, or slashed rates selectively.

The central bank reduced the repo rate – the rate at which banks borrow money from RBI – by 25 basis points on January 29, in its third monetary policy. An increase or decrease in repo rate impacts the interest rate on loans, mortgages and deposits. RBI also cut cash reserve ratio (CRR) – the share of deposits banks have to keep with the central bank – by 25 basis points.

Speaking to Financial Chronicle, a senior official of a leading private sector bank said, “Deposit rates continue to be high, and so is our cost of funds. Till they come down, we can’t lower lending rates.”

The treasury head of another private sector bank, said, “For monetary transmission to happen, it takes around three months. Over the time, as the cost of funds for banks fall, lending rates will come down.”

RK Bansal, executive director, IDBI Bank, said his bank cut base rate and benchmark prime lending rate (BPLR) by 0.25 per cent. “A CRR cut of 25 basis points translates into a saving of 2-3 basis points for a bank. Also, since most banks are hardly borrowing from RBI, a repo rate cut does not translate into a direct saving for a bank.” One basis point is one hundredth of a per cent.

“Monetary transmission should take three months as banks would want a reasonable growth in deposits as well as loans till March,” added Bansal.

State Bank of India (SBI) reduced its base rate by an insignificant 5 basis points to 9.7 per cent, on par with HDFC Bank, which has the lowest base rate in India.

Says head of another public sector bank, “SBI had cut lending rates after RBI reduced rates in the April monetary policy. Those banks that had not cut rates after the April policy are cutting rates now, while those who had reduced lending rates earlier are not reducing it. So, to that effect, monetary policy transmission has happened.”

Another public sector banker said, “Many banks do not want to cut deposit rates as deposit growth has been lower than credit growth. But there are some public sector banks that have still reduced lending rates for growth to pick up. In our case, we have tried to balance by cutting deposit rates in certain buckets. Deposit rates will apply prospectively, so it will take time to impact savings, while lending rate cut applies on the existing book also. So NIMs will get affected in a rising interest rate scenario. The impact on NIMs for us will be 10-15 basis points in Q4FY13, which we will try to compensate by charging higher on loans and getting more fee income.”

Several public sector banks including Punjab National Bank, Union Bank of India, IDBI Bank, Bank of Maharashtra, Bank of Baroda, Bank of India, Canara Bank and Central Bank of India have cut their base rate and benchmark prime lending rate (BPLR) by 25 basis points each, making home, auto and corporate loans cheaper for new and existing borrowers. The base rate is the benchmark to which all loan rates are linked, while BPLR applies to loans taken before July 2010. With the reduction, the base rate of most of these banks stands at 10.25 per cent. On Tuesday, mortgage lender HDFC cut its retail prime lending rates (RPLR) by 10 basis points, effective February 6. Post this reduction, for loans up to Rs 30 lakh, the interest rate for floating loans will be 10.15 per cent per annum, while for loans above Rs 30 lakh, the revised rate is 10.40 per cent per annum.

However, the bigger banks have stayed away from aggressively cutting lending rates. While SBI cut its rates by 5 basis points, ICICI Bank has not cut lending rates so far, while HDFC Bank and Federal Bank have lowered their lending rates only on auto loans. HDFC Bank, the second largest private sector bank, quietly cut its auto loan rates by 0.5 per cent.

However, very few banks such as IDBI Bank, Bank of Baroda and Canara Bank have cut deposit rates. In fact, several banks such as ICICI Bank, Axis Bank, Federal Bank and Dena Bank have raised deposit rates before the monetary policy. State-owned Oriental Bank of Commerce too, has increased deposit rates by up to 2.25 per cent on short-term maturities a few days ago.

A banking analyst said, “Public sector banks have more granular deposits (smaller deposits), while private banks have large deposits. Retail deposit rates are unlikely to come down. The value of retail deposits will increase as they are a stable source of funding. We are seeing new private banks working on increasing their share of retail deposits. Around 50 per cent of the total deposits are bulk deposits that are driven by market rates. Bulk deposit rates have fallen over the past one year.”

In its monetary and macroeconomic development report released on Monday, the central bank has cautioned about the increasing wedge between credit and deposit growth and said the widening wedge posed a concern as it was likely to worsen due to the tight liquidity conditions.

In a press conference on the third quarter review of the monetary policy, D Subbarao, governor of RBI, said, “Credit growth is 16.2 per cent and deposit growth is 13.3 per cent, I think in January. There is quite a lot of wedge, I have not really looked at whether this is the largest or wider gaps in the past and that is one of the structural reasons for the liquidity deficit. And that also explains the reluctance of banks or their inability to reduce deposit rates, which is just as well, because even as we want lending rates to come down for investment purposes, we want deposit rates to stay as high as possible to garner savings.”


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