There is some relief for borrowers, as large banks have started reducing their lending rates across the board after a gap of three years. Punjab National Bank, the second largest lender in the country, and ICICI Bank, the largest private sector lender, on Thursday reduced their base rate by 25 basis points (bps) each to 10.5 per cent and 9.75 per cent, respectively. Another large public sector lender, Bank of Baroda, is likely to reduce its base rate by 25 bps to 10.5 per cent.
The Pune-based Bank of Maharashtra has also announced a reduction in base rate by 10 bps to 10.5 per cent. Yesterday, another public sector lender, IDBI Bank, had reduced its base rate by 25 bps to 10.5 per cent.
The base rate is the benchmark rate to which all loans are linked. As a result, consumer loans like home and auto loans, as well as loan rate for working capital and project loans availed by the corporate sector would become cheaper.
The move comes after the Reserve Bank of India (RBI) reduced the key policy rate or the repo rate by 50 bps in the annual monetary policy on Tuesday, signalling the beginning of a softer interest rate regime.
Deposits, however, will fetch lower returns, as both PNB and ICICI Bank have reduced their retail deposit rates by 25-50 bps. In addition, the banks also reduced their BPLR, the erstwhile benchmark lending rate, applicable for loans taken before July 2010.
“With the easing of systemic liquidity, we have already seen some correction in wholesale deposit rates. We expect the cost of funds to gradually come down and this reduction in the lending rates is a proactive move by us to pass on the benefit to our valued customers,” said Chanda Kochhar, managing director & CEO of ICICI Bank.
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The tight liquidity conditions that prevailed, especially during the second half, in the previous financial year were addressed by the central bank with a reduction in the cash reserve ratio (or CRR, the proportion of cash out of the total deposits banks need to keep with the RBI) by 125 bps to 4.75 per cent in two phases.
Further, the RBI has enhanced the borrowing limit for banks under the marginal standing facility to two per cent of net demand and time liabilities as compared to one per cent earlier to provide an additional liquidity cushion to the banking system.
Banks do not receive any interest for keeping CRR with the RBI.
If the CRR is cut, banks are able to deploy the resources in the market, which earns them a return. Banks also said the CRR cut helped them reduce their lending rates.
| CHEAPER LOANS | ||||
| Bank | Base rate (%) | Reduced by (bps) | Deposit rate reduction (bps) | With effect from |
| ICICI Bank | 9.75 | 25 | 25 | Apr 23 |
| PNB | 10.5 | 25 | 25-50 | May 1 |
| IDBI Bank | 10.5 | 25 | Oct-50 | Apr20 |
| Bank of Maharashtra | 10.5 | 10 | — | May 1 |
| Source: Banks | ||||
“The RBI had reduced the CRR twice, which has released resources that can now be deployed. In addition, by cutting the repo rate, the RBI has signalled the reversal of its monetary policy stance,” said K R Kamath, chairman and managing director of Punjab National Bank.
Most of the lenders, including Union Bank of India, Indian Overseas Bank, United Bank of India and others, will have their asset-liability committee meetings shortly to decide on interest rates.