Banks unlikely to cut deposit, lending rates

Interest rates on home loans are expected to remain stable despite Reserve Bank of India (RBI) sending clear signals to banks in its third quarter review of the annual policy statement to cut lending rates by rationalising deposit rates.

The central bank has also expressed concern on banks not disbursing credit proportionately, and instead parking funds in government securities and other debt market instruments.

Banks, however, seem to be in no hurry to reduce deposit and lending rates. Deposit rate is a sticky subject for public sector banks. Bank chiefs have submitted performance targets including that for business (advances plus deposits) at the beginning of the year (2007-08). These targets have not been revised. With credit offtake slowing down, the only way they can meet their business goal is by garnering deposits. Hence, a deposit rate cut by public sector banks seem unlikely.

"Ample liquidity in the system helped banks keep rates stable in the quarter of January-March. Rates peak during this period every year, but they are likely to remain stable now. We would let this quarter go by. We would have to analyse how liquidity in the system pans out following the tax outflows in March,'' said Chanda Kochhar, deputy managing director, ICICI Bank.

As far as credit growth is  concerned, Kochhar said: "Credit is growing at a healthy 22%. There may be some rebalancing of the book for banks. Retail, for us, is expected to grow at around 15% while corporate credit is expected to grow upwards of 25%. There is a stong investment pipeline.''

Interest rates on long-term deposits are hovering around the 8% mark putting upward pressure on banks' cost of funds, which, in turn, has led to a rise in lending rates. The high lending rates have affected private consumption expenditure, which is evident from the latest RBI numbers.

RBI data shows that growth in personal loans has moderated to 20% at Rs 81,451 crore as on November 23, 2007 as against 35% growth at Rs 1,05,034 crore in the previous year.  Interest rates on home loans have increased to over 10% affecting demand. The rising real estate prices have also had an impact on the loan growth.  Housing loan portfolio of banks has seen a 15% growth at Rs 32,424 crore as on November 3, 2007 as against a 33.4% growth at Rs 53,198 crore in the same period last year.

"In my view, banks would lower rates on deposits and loans only if the liquidity in the system remains comfortable for a prolonged period of time. They are convinced that the operative rate is the reverse repo rate. In the coming months, the bid-offer spread between reverse repo and repo rate, which is currently 175 basis points, will have to be progressively reduced to 100 basis points if banks have to reduce deposit and lending rates," said Mohan Shenio, head (treasury), Kotak Mahindra Bank.

"The rising cost of capital has forced banks to go slow on home loans. This has affected credit growth," said a senior banker.

"There is no case for lending or deposit rates to soften in the short run. Interest rates are determined by market forces. We could se rates softening by April,'' said Neeraj Swaroop, chief executive office, Standard Chartered Bank, India.

On prospects of reduction in interest rates in light of RBI comments on elevated deposit rates, T Narayanasami, chairman and managing director, Bank of India, said: "At present, it (cut) looks difficult. The demand and supply conditions will drive the rate trend.''