After nearly two years, the stage is set for lending rates to come down. With the Reserve Bank of India (RBI) slashing the cash reserve ratio (CRR) by 0.5 per cent, thereby signalling a reversal of monetary policy stance, bankers indicated lending rates would soften, as the reduction in base rates would happen with a lag.
“Perhaps there could be some softening of lending rates in select pockets, where the rates remain at elevated levels,” State Bank of India (SBI) chairman Pratip Chaudhuri said after the announcement of the third-quarter review of the monetary policy, in which the CRR was reduced to inject Rs 32,000 crore of primary liquidity into the system.
The chairman of the largest lender added the cut would help money flow across all sectors, which in turn would lead to softening in cost of funds.
Starting from January 2010 till October 2011, as part of a policy stance to contain persistently high inflation, the central bank cumulatively raised the CRR by 100 basis points and the policy rate (repo rate) 13 times, by 375 basis points.
RBI Governor D Subbarao, in his customary post-policy interaction with the media, the policy action would bring down the lending rates. “We do expect that lending rates will come down, but I cannot speak on behalf of the banks. On behalf of the Reserve Bank, I can say that there are no big concerns on monetary policy transmission,” he said.
Chaudhuri, however, said a reduction in deposit rates would depend on what was being offered by competing savings instruments like tax-saving bonds. “Our asset and liability committee will meet very soon and then take a call (on deposit rates). But a cut in deposit rate will also depend on what all the competing saving instruments are offering. With so many tax saving instruments in the market with an 8.3-8.5 per cent range, one has to be really circumspect to cut the deposit rates,” he explained.
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ICICI Bank, the largest private sector lender expressed similar views. It maintained lending and deposit rates would depend on how the cost of funds and demand for deposits pan out. “It is a clear indication that the interest rates have peaked and the CRR cut will help liquidity injection in the system. But it is premature to comment on when the lending rates will be cut,” said Chanda Kochhar, MD and CEO.
Aditya Puri, managing director, HDFC Bank, said “Though it is too early to take a call on cutting the lending rates, interest rates are on a downward trend. In general cost of money should come down, but the interest rates would also depend on the extent of government borrowings.”
M D Mallya, chairman, Indian Banks’ Association, said, “RBI expects credit growth to pick up in calendar year 2012, as liquidity will improve. The central bank said credit growth during the last quarter has remained subdued mainly due to the cautious approach of the bank. This also led to revise credit growth forecast for the financial year downward to 16 per cent from 18 per cent.”
As lenders turned cautious, alternative sources of financing like commercial papers and bonds became prominent, according to bankers. Fund raised through these instruments, mostly by companies, were used to meet working capital requirements.
Financing was mostly happening through CPs and CDs. This was not reflected in the credit growth numbers, said K R Kamath, chairman and MD, Punjab National Bank.
“Now with the liquidity available, credit growth will start to pick up,” he noted.