Banks in no hurry to cut lending rates

Last Updated: Tue, Jun 18, 2013 04:28 hrs
A labourer works on the sign of a bank building in the western Indian city of Ahmedabad

Your wait to borrow money at cheaper rates will continue, as banks are unlikely to pare lending rates anytime soon.

The high cost of funds, coupled with pressure on net interest margins and additional provisioning requirements, have left banks with very little room to reduce rates. The status quo is also expected to continue, as the Reserve Bank of India (RBI) kept its key policy rates and banks' cash reserve ratio (CRR) requirements unchanged in the mid-quarter monetary policy review today. "The rupee has depreciated sharply, while the current account deficit has widened. Hence, it was not a surprise to see RBI maintaining status quo," Shubhalakshmi Panse, chairperson and managing director of Allahabad Bank, told Business Standard, adding, "We have been pro-active in monetary transmission and reduced our base rate in February. But I don't think the current environment is conducive for further rate cuts. Banks are unlikely to cut rates unless there is a 50 basis points reduction in policy rates or CRR."

Most bankers spoke similarly and said lending rate cuts were possible if deposit rates started declining. "As of now, it looks like status quo (on lending rate cuts). We would be carefully watching the trajectory and our ability to contain the cost of deposits. That would determine our future view point on lending rates," said S S Mundra, chairman and managing director of Bank of Baroda.

Industry, however, was not happy; it has been demanding a reduction in rates for some time. "The decision is disappointing," said Chandrajit Banerjee, director general of the Confederation of Indian Industry. The property developers' association, the Confederation of Real Estate Developers' Association of India, said status quo on rates was likely to lead to an "irreversible economic slowdown".

The government has also urged banks to consider lowering of interest rates to encourage investments and accelerate economic growth. "There is pressure on nationalised banks to cut rates. Banks are constrained in cutting lending rates because deposit rates are still high and there is pressure on asset quality. But within that constraint, we have been offering concessional rates to micro and small enterprises, and other priority sectors. We will continue to look for an opportunity to cut rates but unless deposit rates fall, there is very little that we can do," said M Narendra, chairman and managing director of Indian Overseas Bank.

Most bankers also expect deposit rates to stay high unless RBI takes steps to improve liquidity in the system. "It is difficult to reduce deposit rates further, as it will create a disincentive for savings. There is already a pressure on banks' net interest margin. Hence, lending rate cuts are unlikely," said Sanjay Arya, executive director of United Bank of India.

A few bankers, however, expressed optimism that lending rates might fall in the first week of July if inflationary pressure eases. "We have started reducing our deposit rates. On June 10, we cut interest rates on deposits maturing in one year by 25 basis points. We will review our margin and cost of funds at the end of this month. If possible, we will reduce our lending rates in the first week of July. It is not a commitment and I'm not sure if it will be possible. It will depend on our margin and cost of funds," said S L Bansal, chairman and managing director of Oriental Bank of Commerce.

"As inflation trends down and increases the possibility of rate cuts, we are likely to see both depositor and borrower beginning to see positives. We remain cautiously optimistic of what the future holds for us," said Shyam Srinivasan, managing director and chief executive of Federal Bank.

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