The loan rate for consumer segments such as home and automobile loan rates might see a further fall, following a reduction in the cash reserve ratio (CRR).
Since most banks are offering small value home loans, that is up to Rs 30 lakh, at the base rate, the interest rate for home loans of more than Rs 30 lakh might see a fall. In addition, according to bankers, small and medium enterprises (SMEs) are also likely to benefit, as they might offer a reduced rate. But, since RBI’s CRR cut of 25 bps will provide additional liquidity support, banks might start cutting the deposit rates, too. Bankers said a fall in the deposit rate will lead to a decline in the cost of funds, which will eventually bring down the base rate, the benchmark lending rate to which all the loans are linked.
“With the additional liquidity support due to reduction in CRR, deposit rates will come down. As the cost of funds declines, the base rate will also fall but with a lag,” said M D Mallya, CMD, Bank of Baroda. The lender had revised the loan rates to auto and home loan borrowers last week.
| LIQUIDITY LOGBOOK A CRR cut of 25 basis points to 4.5% will infuse an additional liquidity of Rs 17,000 crore into the banking system. A break-up of how large banks will benefit following the liquidity infusion | |
| Bank | Additional liquidity for onward lending |
| State Bank of India | Rs 2500 crore |
| Punjab National Bank | Rs 900 crore |
| Canara Bank | Rs 800 crore |
| Bank of Baroda | Rs 720 crore |
| IDBI Bank | Rs 580 crore |
| Indian Overseas Bank | Rs 400 crore |
| Source: Banks | |
Chennai-based public sector Indian Overseas Bank sees some adjustment in loan rates to the SME segment and home loans of more than Rs 30 lakh. “We are offering home loans (up to Rs 30 lakh) at the base rate, so there is no scope for further reduction but for loans more than Rs 30 lakh, we may think of adjusting the spread. Some sectors like SMEs and gold loans may see rates softening. Base rate revision may not happen immediately,” said M Narendra, chairman and managing director.
However, bankers see the possibility of deposit rates starting to come off with the improved liquidity. “Deposit rates may come down as the CRR cut will improve liquidity in the system,” Narendra added.
Bangalore-based Canara Bank also sees a deposit rate revision. “We have already reduced the interest rate on retail loans. This CRR cut, which will provide liquidity, may see deposit rates softening. There is a distinct possibility that banks start to reduce lending rates across the board once RBI reduces the repo rate in the October policy review,” said S Raman, chairman and managing director.
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Most of public sector banks had reduced their retail lending rates after the first quarterly review of monetary policy by RBI in July. RBI had reduced the Statutory Liquidity Ratio to 23 per cent from 24 per cent in the last review.
“The CRR cut will help us to improve liquidity, although it’s not a major issue at this time. Deposit rates will come down as a result of this action and the reduction in base rate will follow in some weeks. It should be the beginning of the path of reducing the base rate, said Shiva Kumar, managing director, State Bank of Bikaner and Jaipur.
Already some banks have reduced deposit rates, including the country’s largest lender, State Bank of India, and the biggest private lender, ICICI Bank. Others are likely to follow suit. Most banks’ asset-liability committees would be meeting in the next couple of days to take a further call.
Some bankers feel RBI has cut CRR to neutralise the forward currency liability. “RBI intervened in both spot and forward markets to control the volatility of the rupee. Therefore, we feel RBI will use the CRR cut to adjust it and it (additional liquidity) will be absorbed without idling into the banking system for a long time ” said Rajat Monga, chief financial officer, YES Bank.