While State Bank of India is exploring possibility to cut its base rate following 25 bps reduction in cash reserve ratio, other public sector banks are finding it difficult as the hike in provisioning requirement for restructured advances are going to impact their bottomline.
However, if SBI cuts its base rate further, others may follow suit, as most lenders have started losing out business to the country’s largest lenders whose benchmark lending rate is 75 bps lower than most public sector banks.
The Reserve Bank of India, (RBI) in its second quarter review of monetary policy had reduced the CRR by 25 bps points which would infuse Rs 17,500 crore of primary liquidity in the system. However, at the same time the central bank hiked provisioning requirement for standard restructured advances by 75 bps to 2.75%. Since most public sector banks are seeing rise in loan recast such an increase in provisioning is going to hit their balance sheet.
“The benefit accrued to us due to lowering of CRR has been more than offset by increase in provisioning. As a result, we will not be able to lower the base rate,” said a chairman and managing director of a public sector bank. Base rate is the benchmark lending rate to which all loan rates are linked to.
SBI, on the other hand, has a comfortable liquidity position, as deposit accretion was robust unlike other banks. According to bankers, SBI’s unfixed deposit scheme has given the bank a sizable amount of deposit. At a time when loan growth is not picking up, SBI is keen to lower rates to deploy its deposits.
SBI chairman Pratip Chadhuri had hinted after the RBI’s CRR cut on Tuesday that the bank may pass on the benefit to their customers. “We will prefer a more secular rate cut with adjustment in base rate because we have almost completed rebalancing of the portfolio. The spreads we may not touch but it’s for asset liability committee to take a call,” he had said.
The CRR cut will release Rs 2750 crore for SBI, if deployed at 8% that would fetch Rs 225 crore. Though impact of rise in provisioning for SBI will be Rs 300 crore but the bank said it is not a significant hit for them as it has already budgeted Rs 10,000 crore for provisioning in the current financial year.
Though SBI’s deposit mobilization was healthy, but the banking industry had faced slower growth of deposit. According to RBI data, for the year till 19 October, credit growth was 16% while deposit growth was 13.6%.
At present, SBI’s base rate is at 9.75% while public sector banks have their base rate at 10.5%.
According to a senior official of a large public sector banks, if SBI cuts base rate, other have to follow suit to remain in competition. “Already SBI’s base rate is 75 bps lower than us. If SBI cuts it further, we may have to follow despite having pressure on margins,” the official said.
SBI’s competitors are already facing the heat as they are losing business, particularly retail loans.Following the sharp reduction in spreads of home loans and base rate which were effected in the last couple of months, SBI’s daily home loan sanctioned has almost tripled to Rs 150 crore.
“I think it will take another 15-20 days to see if there is a possibility to lower lending rates. It will depend on how the short term rate behaves. If deposit costs come down, then we will be able to cut the loan rates,” said SL Bansal, chairman and managing director, Oriental Bank of Commerce.
Base rate of banks (in %)
SBI – 9.75
ICICI Bank – 9.75
HDFC Bank – 9.8
PNB – 10.5
BoB – 10.5
Canara Bank – 10.5
BoI – 10.5
Union Bank – 10.5