 "IDBI, SBT cut rates")
Banks on Friday started passing on the benefits of the huge deposit accretion due to demonetisation, with IDBI Bank cutting its lending rate by 15 basis points, even as the government told banks to ensure there was adequate cash available in rural areas and cash vending machines were replenished on time.
Friday was the last day for banks to receive old Rs 500 and Rs 1,000 currency notes, and the Reserve Bank of India’s estimates said that till December 10, Rs 12.4 lakh crore had been deposited in banks. More money has come into the banking system, which directly went to the savings accounts, where banks pay only 4% interest. This is a substantial drop in cost of funds for banks, which they are obliged to pass on to their customers according to their lending rate calculation methodology.
This explains why IDBI Bank reduced its marginal cost-based lending rate (MCLR) and also the old base rate by up to 15 basis points. The MCLR is revised every month by 5-10 basis points. A basis point is a hundredth of a percentage point.
Following the revision, IDBI Bank’s one-year MCLR stood at 9.15% and the base rate, or the minimum lending rate (as followed earlier), was 9.50%. Since April, IDBI Bank has lowered its MCLR by 30-60 basis points across tenors.
“The reduction in the MCLR is expected to positively impact loan growth; both in the retail consumer segment and in corporate sector lending, thereby supporting growth impulses in the economy,” IDBI Bank said in a statement.
State Bank of Tranvancore (SBT), a subsidiary of SBI, also slashed benchmark lending rate by up to 0.3%. The bank has reduced marginal cost of funds based lending rate (MCLR) by 0.25% from 9.45% to 9.20% for 1-year tenure, SBT said in a statement.
Other banks, too, will have to lower their lending rates, mainly because of the huge deposit accretion due to demonetisation.However, lending rates could rise soon after money was withdrawn from accounts on normalisation of the cash crisis, a banker warned.
“It is all formula driven and we are not compelled by anyone. Our cost of funds has come down, therefore, we are lowering rates but when the cost of funds rises due to withdrawals, we may have to increase rates going by the formula. But that should take about six months,” a banker said.
Even as the cash crunch persists and bank branches struggle with inadequate cash supply, the government and bankers are hoping the situation will normalise soon.
On Friday, Financial Services Secretary Anjuly Chib Duggal told bank chiefs in a video conference to maintain adequate cash supply in rural areas and to ensure that all ATMs were functional.
“As the bank leg of the demonetisation exercise came to an end of Friday, the government wanted to take stock of the situation, and stressed that we focus on rural areas so that there is no inconvenience,” said a banker present in the meeting.
Also, news of ATMs running dry has not gone down well with the government, given the cash supply from the RBI has increased recently.
According to another banker, the meeting discussed how the situation can be managed from January 1, with the focus on cash management and improving logistics. Bankers were told to push more for digital banking and improving the payments infrastructure No discussion was held on interest rates, said the banker.
According to another banker, the meeting discussed how the situation can be managed from January 1, with focus on cash management and improving logistics. Bankers were told to push more for digital banking and improving the payments infrastructure No discussion was held on interest rate, said the banker..
Bankers told the financial services secretary that there should not be any problem in meeting the salary-day pressure as there was adequate cash in branches. They also promised that all ATMs would soon be functional, at least for a good part of the day, and efforts would be made to dispense more Rs 500 notes.
