The Reserve Bank of India’s second quarter monetary policy review signalled an exit from the central bank’s accommodative stance, leading many to believe that interest rates would move in only one direction – north.
A month on, the rates have actually gone down. A top-rated Indian company could have availed of a six-month loan at 8 per cent or so a month ago; today it can do so at a rate that is 100-150 basis points lower.
Similarly, the cost of one-year loans has declined by about 100 basis points to 7-9 per cent over the last four weeks, while loans for five years, which cost 10 per cent, have become 50-75 basis points cheaper.
| ALL IN A MONTH |
| * Six-month loan rate drops 100-150 basis points; one-year loan rate 100 basis points |
| * SBI, PNB cut deposit rates |
| * Many others cut auto, home and farm loan rates |
| * Yield on 10-year paper drops from 7.35% on October 27 to 7.18% |
Within days of the policy, State Bank of India (SBI) and Punjab National Bank (PNB), the two largest in the public sector domain, lowered its deposit rates by 25-50 basis points, besides extending special home loan schemes for few more months.
Axis Bank followed suit and offered home loans at 8 per cent for the first year. A few days ago, HDFC Bank lowered the interest rate on used car loans, while PNB reduced auto loan rates by 50 basis points. The National Bank for Agriculture and Rural Development, too, lowered their refinance rate, while Punjab & Sind Bank cut interest rates on farm loans.
“One of the main reasons for softening of interest rates is weak credit demand. Also, there is adequate liquidity in the system. A bulk of the lending is happening for the short-term,” said Partha Mukherjee, president (Credit), Axis Bank.
The year-on-year growth in bank credit had plummeted to a new 12-year low of 9.8 per cent at the end of October. Similarly, on Friday, banks parked Rs 54,470 crore through the Reserve Bank’s reverse repo window, which is used to suck out excess liquidity, as against over Rs 1,00,000 crore between April and September.
“Short-term interest rates have declined because of low credit flow, excess liquidity and the absence of investment options. But they will go back to the original levels once credit flow improves,” said Canara Bank chairman and managing director A C Mahajan.
With the reverse repo rate at 3.25 per cent and investment in a liquid fund scheme generating an annualised return of 5 per cent, banks found short-term credit at 7 per cent a year the better option. Besides, the Reserve Bank is uncomfortable with banks increasing their exposure to liquid mutual funds.
“The rates are liquidity-based and not market-linked. It has to be compared with a bank’s treasury operations,” said a public sector bank chief.
Bank of India executive director B A Prabhakar said the pressure of government borrowings, intense in the first half, had eased. “This takes away the trigger for bond yields to move northward,” he said.
The yield on 10-year paper dropped from 7.35 per cent on October 27 to 7.18 per cent on Friday. A section of bankers said the signals from the bond markets pointed to easing of rates, but others attributed the lower yields to the completion of nearly 85 per cent of the government’s record borrowings of Rs 4,51,000 crore.
What has also helped is the reduction in deposit rates over the last 12 months. Since April, SBI has lowered deposit rates eight times to lower cost and improve margins.
“If there is no demand for credit, why should banks take deposits at a higher rate of interest? Unless credit expansion takes place, there is no use for deposits at a higher interest... The rate of interest is a function of demand and one of the options is to reduce it,” said Andhra Bank chairman and managing director R S Reddy.
Prabhakar said, with companies able to tap external commercial borrowings and institutional investors raising equity, interest rates would remain low for a few more months.
“A shift from short-term to long-term borrowing will not happen until the fourth quarter, as interest rates are expected to rise once demand picks up,” said an executive with a large private sector bank.
There is also a flip side. “Customers are able to reduce their interest cost, but banks have to worry about the asset quality. At the present rate, the credit risk is not getting factored into the pricing,” said another banker.
