 "Banks get more time to cut rates")
Bankers can breathe a sigh of relief after the Reserve Bank of India (RBI) decided to keep the repo rate unchanged in its sixth bi-monthly monetary policy for 2014-15 announced on Tuesday.
Pressure has been mounting on lenders to reduce their base rates following the repo rate cut on January 15. But only a couple of banks - Union Bank of India and United Bank of India - have lowered their minimum lending rate in the past three weeks. Most banks will wait till the end of March and a base rate reduction is only expected during the next quarter.
Bankers are not willing to speak openly on this subject, but in private they admit that the status quo on the repo rate has offered them some more time before they start revising their lending rates. "If the repo rate was cut twice in a space of 15 days, public sector banks would have been forced to reduce their base rates. There would not have been any other option," an executive director with a state-run bank said, requesting anonymity.
"The Reserve Bank is not the owner, not involved in the day-to-day running of banks. That (rate cut) is a decision that owners and management will have to take. We cannot nudge them," RBI Governor Raghuram Rajan told reporters in Mumbai.
"We can only comment on the fact that despite a substantial fall in long-term interest rates, treasury rates and corporate bond rates, bank lending rates have remained more or less flat... In general, base rates have not changed. Of course, when you talk to banks they are very happy that we have cut rate. But at some point, my guess is, transmission has to take place," he added.
Many bankers claimed their cost of funds was high and a lending rate cut will dent their margins. Also, they were not sure if a rate cut will revive credit demand as corporate groups are increasingly borrowing from non-banking sources to meet their funding requirements.
"As a banker I will cut my lending rate only when I find my cost of fund has declined significantly. Also, there is no certainty that if I reduce my rate today, my credit growth will pick up tomorrow. We have to consider all these factors otherwise it will stress our margin further," the chairman and managing director of a public sector bank said.
While the central bank has not cut lending rates, it has reduced the statutory liquidity ratio (SLR) requirement from 22 per cent to 21.5 per cent of their net demand and time liabilities - a move that will free up cash for deployment. However, as credit demand is low, banks are already holding SLR much above the requirement. The SLR reduction will only help banks when credit picks up.
"The cut in SLR will serve the twin purpose of providing growth-supportive liquidity measures of about Rs 45,000 crore and to preserve the interest spread," said Arundhati Bhattacharya, chairman, State Bank of India. The move will release Rs 7,000 crore for SBI.
Bank of India Chairperson and Managing Director V R Iyer said the cost of deposits has declined by just five basis points in last three months for the bank. "They (costs) have to go down further before we can decide to reduce the lending rate. We have to wait for one-two months for a rate cut," she added.
Rating agency Crisil said it expected rate transmission to be slow as banks are still struggling with non-performing loans. "We expect RBI to cut rates by 50-75 basis points through the next financial year. However, transmission of lower policy rates to lower lending rates and eventually growth will be a slow process given high non-performing assets at banks and downward rigidity in lending rates," it said in a note.
Rajan said he was hopeful that banks will start revising their lending rates soon as at some point the lenders will have to resume financing again. "I'm hopeful that it is only a matter of time before banks judge that they should pass it on. Many have been relatively quick to cut their deposit rates but not so quick to cut their lending rates. I presume some are hoping that they can get the spread for a little more time to repair their balance sheets...I think the pressure of competition will eventually force them to pass through these cuts. Let us wait and see," he said.
Pressure has been mounting on lenders to reduce their base rates following the repo rate cut on January 15. But only a couple of banks - Union Bank of India and United Bank of India - have lowered their minimum lending rate in the past three weeks. Most banks will wait till the end of March and a base rate reduction is only expected during the next quarter.
Bankers are not willing to speak openly on this subject, but in private they admit that the status quo on the repo rate has offered them some more time before they start revising their lending rates. "If the repo rate was cut twice in a space of 15 days, public sector banks would have been forced to reduce their base rates. There would not have been any other option," an executive director with a state-run bank said, requesting anonymity.
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While the banking regulator has observed the delay on the part of lenders to mirror its rate cut action, it is unlikely to nudge them in revising their lending rates.
"The Reserve Bank is not the owner, not involved in the day-to-day running of banks. That (rate cut) is a decision that owners and management will have to take. We cannot nudge them," RBI Governor Raghuram Rajan told reporters in Mumbai.
"We can only comment on the fact that despite a substantial fall in long-term interest rates, treasury rates and corporate bond rates, bank lending rates have remained more or less flat... In general, base rates have not changed. Of course, when you talk to banks they are very happy that we have cut rate. But at some point, my guess is, transmission has to take place," he added.
Many bankers claimed their cost of funds was high and a lending rate cut will dent their margins. Also, they were not sure if a rate cut will revive credit demand as corporate groups are increasingly borrowing from non-banking sources to meet their funding requirements.
"As a banker I will cut my lending rate only when I find my cost of fund has declined significantly. Also, there is no certainty that if I reduce my rate today, my credit growth will pick up tomorrow. We have to consider all these factors otherwise it will stress our margin further," the chairman and managing director of a public sector bank said.
While the central bank has not cut lending rates, it has reduced the statutory liquidity ratio (SLR) requirement from 22 per cent to 21.5 per cent of their net demand and time liabilities - a move that will free up cash for deployment. However, as credit demand is low, banks are already holding SLR much above the requirement. The SLR reduction will only help banks when credit picks up.
"The cut in SLR will serve the twin purpose of providing growth-supportive liquidity measures of about Rs 45,000 crore and to preserve the interest spread," said Arundhati Bhattacharya, chairman, State Bank of India. The move will release Rs 7,000 crore for SBI.
Bank of India Chairperson and Managing Director V R Iyer said the cost of deposits has declined by just five basis points in last three months for the bank. "They (costs) have to go down further before we can decide to reduce the lending rate. We have to wait for one-two months for a rate cut," she added.
Rating agency Crisil said it expected rate transmission to be slow as banks are still struggling with non-performing loans. "We expect RBI to cut rates by 50-75 basis points through the next financial year. However, transmission of lower policy rates to lower lending rates and eventually growth will be a slow process given high non-performing assets at banks and downward rigidity in lending rates," it said in a note.
Rajan said he was hopeful that banks will start revising their lending rates soon as at some point the lenders will have to resume financing again. "I'm hopeful that it is only a matter of time before banks judge that they should pass it on. Many have been relatively quick to cut their deposit rates but not so quick to cut their lending rates. I presume some are hoping that they can get the spread for a little more time to repair their balance sheets...I think the pressure of competition will eventually force them to pass through these cuts. Let us wait and see," he said.