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The Reserve Bank of India (RBI) cut its key policy rate by 25 basis points and vowed to improve liquidity in the market but banks are not going to soon reduce lending rates any time.
Bankers said the new lending rates (under the Marginal Cost of funds-based Lending Rates, or MCLR) have been announced just at the start of the month. The first priority is to review rates on resources (deposits). Only a further fall in cost of funds would create room to pass on benefits to borrowers in the form of cheaper loans.
The effect of the policy rate cut would be felt first in the money market, where the companies and financial institutions raise short-term funds. Any revision in loan rates would be visible next month as banks have to revise these each month under the MCLR regime.
State Bank of India (SBI) Chairman Arundhati Bhattacharya said deposit rates will need to come down further for meaningful transmission.
The decision to keep liquidity deficit at neutral mode and also narrowing the liquidity adjustment facility corridor will result in a predictable and stable liquidity regime. It would facilitate better transmission across financial markets.
Agreeing with the views of the SBI chief, a chief financial officer at a private bank said, “Before cutting any lending rate, we will have to bring down the deposit rates. Some banks had already started reducing the retail and bulk deposit rates in anticipation of a rate cut by the RBI. These banks will be in a better position to cut the rates. We may see a few banks cutting rates soon, but for several banks, it will take up to 30-45 days.”
Bankers also believe that the steps taken by the RBI to free up the liquidity will also take about four to six weeks to come into effect, and as a result, banks would wait for the policy decision to translate into action before reducing rates.
A Union Bank of India executive said the RBI’s move does create condition for softening interest rates. But, the room for cutting deposit rates looks limited for now. Further cut in lending rates would hardly push investments up. First banks would review rates on the resources side.
Another factor that may be a hindrance in slashing rates is the fact that the one-year small-saving scheme deposit rates are hovering between 7.70-8.10 per cent, as compared to the bank fixed deposit rates which are between 7.30-7.50 per cent. Therefore, banks believe that a further cut in deposit rates may be act as a deterrent. Moreover, this comes at a time when growth in deposit has dropped to 9.7 per cent till-mid of March as compared to 10.7 per cent, same period last year.
“The MCLR rates have been introduced from 1st April and it has to be reviewed every month. Typically, I believe that some banks may choose to wait for that review till the end of the month and then review base rates and MCLR rates together,” said Ashutosh Khajuria, executive director, Federal Bank.
