Ahead of the festive season, the high cost of funds and sluggish credit growth have prompted public sector banks to consider reducing interest rates in certain portfolios, especially the retail and small & medium enterprise (SME) segments.
Last month, the Reserve Bank of India (RBI) had cut the cash reserve ratio, or CRR, (the funds banks have to keep with RBI as cash) 0.25 per cent to 4.50 per cent. It was expected the move would infuse Rs 17,000 crore into the monetary system.
Responding to this, State Bank of India (SBI) cut its base rate 0.25 per cent to 9.75 per cent. Ruling out the possibility of a further cut in the base rate, Diwakar Gupta, chief financial officer and managing director, said ahead of the festive season, the bank might consider launching special loan schemes to boost demand.
“Currently, we do not contemplate further reduction in the base rate. However, we might decide to launch special schemes like providing a one-time rebate to customers,” he said.
SBI has excess case reserves of about Rs 60,000-90,000 crore. As credit growth is sluggish, the bank is finding it difficult to deploy these funds. Smaller public sector banks have already resorted to reducing interest rates on a few portfolios.
“Unless the repo rate (the rate at which banks borrow from RBI) comes down, it will not be possible to reduce the base rate. Due to the high inflation, we cannot reduce deposit rates, too. We responded to RBI’s CRR cut by offering preferential rates,” said M Narendra, chairman and managing director, Indian Overseas Bank. The bank has already launched several special rate schemes in the housing and car loan portfolios, apart from waiving processing fees for certain loans. Recently, it had cut the interest on housing loans 1.50 per cent and that on loans against jewellery from 14.25 per cent to 12.50 per cent. Narendra said the bank might reduce the rates further.
“The benefit of a reduction in the base rate is often limited to large companies. By reducing interest rates selectively, its benefits can be given to a large number of customers,” Narendra said.
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Next week, asset liability committees of several public sector banks would meet to decide on base rates.
Recently, Kolkata-based United Bank of India had cut interest rates for loans to SMEs by 75-225 basis points. This was the first time the bank had cut interest rates in a particular portfolio. Currently, the bank’s base rate is 10.45 per cent. “We are working on ways to reduce interest rates. However, unless the cost comes down, it would be difficult to reduce the base rate. We are collecting information on different portfolios and would take a decision soon,” said Bhaskar Sen, chairman and managing director, United Bank of India.
Currently, the bank’s SME portfolio stands at about Rs 8,000 crore, about 12 per cent of its total portfolio. The bank has reduced its credit growth target for this financial year from 20 per cent to 15-16 per cent. In the quarter ended June, its credit growth stood at 19.85 per cent.
Kolkata-based Allahabad Bank has reduced interest rates on retail loans. “In our half-yearly assessment, we found the cost of deposits had declined only marginally. We will take a call on the possibility of reducing the base rate next week,” said T R Chawla, executive director, Allahabad Bank.