Bankers today said that there was limited scope for reducing lending rates in the immediate future and the benefits of lower policy rates had already been passed to borrowers.
This was in response to the Reserve Bank of India’s (RBI’s) statement in its first quarter review of the monetary policy that banks could reduce rates further.
“The fact that RBI has kept rates unchanged gives enough indication that banks have reduced interest rates. Corporates are enjoying credit at low rates and they are enjoying a lot of profitability. Corporates should now pass the benefits to consumers… I expect interest rates to remain stable for the next six months. RBI may reverse its policy stance in January,” said Canara Bank Chairman and Managing Director AC Mahajan.
Between October 2008 and July 2009, the central bank has lowered the repo rate, the rate at which it lends to banks, by 425 basis points to 4.75 per cent to signal a reduction in interest rates. The cash-reserve ratio, or the proportion of deposits that banks set aside, has been slashed by 400 basis points to 5 per cent during the period to enhance liquidity in the system. The reverse repo rate, a tool used to suck out excess liquidity, has been cut 275 basis points to 3.25 per cent to ensure that banks lend.
Banks have responded with steeper cuts in deposit rates than benchmark prime lending rates (see table).
RBI acknowledged the changes and said that between March 2008 and March 2009, lending rates had dropped 120 basis points to 11.10 per cent, with further reduction seen during the first quarter of the current financial year. Besides, it pointed out that sub-BPLR lending was on the rise due to competition among banks.
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A bank chief said that with the last round of reduction earlier this month, it was difficult to lower rates immediately.
“There has been a substantial reduction in the cost of borrowing for companies and net interest margins of many banks have come down. Many banks have transmitted the rate reduction (to customers),” said Union Bank of India Chairman and Managing Director MV Nair, who also heads the Indian Banks’ Association.
“There could be a 100 basis point cut in our lending and deposit rates in the next three months depending on the maturity of high-cost deposits. Yields on advances have been paid but high-cost deposits can’t be paid until maturity. These high-cost deposits are of different maturities like February, March, and the total interest (payments) will come down then,” said Uco Bank Chairman and Managing Director SK Goel.
| A KIND CUT Reduction in rates (October 2008 – July 20, 2009) | ||
| Deposit rates | Lending rates (BPLRs) | |
| Public sector banks | 125-325 | 125-275 |
| Private sector banks | 100-375 | 100-125 |
| Five major foreign banks | 125-300 | 125 |
| Note: Figures in basis points Source: RBI | ||
But Goel is in a minority. “Though interest rates may remain stable for the time being, I don’t see them coming down. They may harden in the next six months,” said Indian Overseas Bank Chairman and Managing Director SA Bhat.
In its first quarter review of the monetary policy, RBI said that since concessional lending rates were linked to BPLR for some sectors, they made overall lending rates less flexible. Even as banks have reduced lending rates by over 100 basis points in the last nine months, RBI sees further scope for reducing lending rates.