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Punjab National Bank–the third largest lender of the country–has slashed fixed deposit rates upto 200 bps on various maturities. Another public sector lender, Oriental Bank of Commerce also said that it will offer 25-50 bps less on new deposits from tomorrow, on shorter tenures. More banks are likely to follow suit.
At the same time, some good news can also be expected later in this month. The deposit rate cut, which will reduce banks cost of funds, will enable the lenders to reduce the base rate too. Base rate is the benchmark reference rate to which all the interest rates are linked with.
HDFC Bank–the second largest private sector lender–had earlier announced to reduce their base rate by 10 bps to 9.6%, with effect from today.
“We want to reduce the cost, so we have cut the deposit rate. This will help us in bringing down the lending rates,” SL Bansal, chairman and managing director of Oriental Bank of Commerce (OBC) told Business Standard. He added that the bank will review the situation on rates in the next 15-20 days. At present, OBC’s base rate is at 10.25%.
State Bank of India (SBI)—the country's largest lender—said it will be careful before revising the deposit rate.
"We had reduced the deposit rate to 8.5% and have seen deposit flowing out from us. We will be very cautious in revising the deposit rate downward. We can afford to pay the present deposit rates, keeping the base rate at 9.7%, which is one of the lowest in the industry," said Pratip Chaudhuri, chairman, SBI.
However, some of the other large banks feel there is scope to reduce the deposit rate.
“By mid April, I think both deposit rate will be realigned substantially. In addition, depending on the liquidity situation and the cost of funds, lending rates will also be reviewed. We will also review our rates during that time,” said SS Mundra, chairman and managing director of Bank of Baroda, which is the second largest lender in the country which offers .
For deposits of less than Rs 1 crore, PNB has cut the interest rate to 7.50% from 8.75% of maturity period of 180 days to less than one year. For deposits of Rs 1 crore to Rs 10 crore, rates have been reduced to 200 bps to 6.5% for 30-45 days maturity. For 6 month to less than 1 year maturity, rates have been reduced by 50 bps to 8.25%.
Following tight liquidity conditions in the last quarter of the financial year, banks hiked deposit rate to support their credit off take. Banks have borrowed was more than Rs 1 lakh crore from the repo window of RBI in March.
The liquidity tightness of March had made the banks to avail the marginal standing facility of RBI. Funds availed via MSF attracts interest rate of 8.5% which is 100 bps more than the prevailing repo rate.
Liquidity tightness is expected to come down, as loan demand remains weak during the first half of the financial year.
“This is the beginning of the financial year so there is not so much appetite for loan demand. Deposit rates are already high and banks have not reduced it after the repo rate cut in the March policy of RBI. So, there is a case to review the deposit rate,” said M Narendra, chairman and managing director of Indian Overseas Bank, adding that for lending rates for come down, deposit rates needs to be reduced first.
During its mid quarter policy review on March 19, the central bank had reduced the repo rate by 25 bps to 7.5%. RBI will now meet on 3 May for the annual policy review.
