Bankers On Wednesday told the Reserve Bank of India (RBI) that it will be difficult to make significant cuts in lending rates for about six months – the time required by them to shed high-cost deposits.
“We have conveyed that banks are still saddled with high-cost bulk deposits. There will be room for cutting lending rates only after these deposits are redeemed over the next few months,” said a banker after attending the pre-policy consultative meeting with the RBI’s top brass, led by Governor D Subbarao.
Responding to RBI’s aggressive cuts in key interest rates, public sector banks have already reduced their benchmark prime lending rates by at least 150 basis points since October 2008. This has provided some benefit to customers.
But the lending rate cuts have also translated into an immediate drop in the growth of interest income along with a decline in net interest margin (NIM). The moderation in credit demand has also impacted income. For some banks, the NIM – which was around 3 per cent in the third quarter – is expected to drop by up to 50 basis points for the fourth quarter.
“Hence, lending rates will remain sticky till the costs of funds come down and till we see an easing of pressure on the NIM,” said the chief executive of a Mumbai-based public sector bank. The official added that the benefits of redemption in high-cost deposits will accrue only by September 2009, giving room for a reduction in lending rates around that time.
In the immediate future, state-owned banks are likely to consider a 50-75 basis point reduction in deposit rates in about two-three weeks, which is likely to be followed by a 50 basis point reduction in lending rates.
In addition to discussing the sensitive issue of interest rates, the bankers also used the occasion to convey their apprehension that non-performing assets (NPAs) may see a rise and that there could be a moderation in credit growth in 2009-10 due to the global financial meltdown.
“If there is a sharper downturn, it can further impact the asset quality. Banks are looking for a lower rate of loan growth this year,” said T S Narayanasami, chairman of Indian Banks’ Association.
During the meeting, banks also expressed concern over the 5 per cent provisioning mandated by the apex bank for restructured accounts. Banks feel that this additional provisioning will be a burden and impact their profitability, another banker said.
Banks also told the RBI that they expect the credit growth to moderate to 18-20 per cent in 2009-10, much below a 25-30 per cent growth recorded in the past. In fact, RBI’s latest data on scheduled commercial banks’ business indicated that credit growth in 2008-09 has dipped to 17.27 per cent from 21.60 per cent in 2007-08.
The bankers who attended the meeting included Punjab National Bank CMD K C Chakrabarty, Canara Bank CMD A C Mahajan, Standard Chartered India Chief Neeraj Swaroop, Union Bank of India CMD M V Nair and IDBI Bank CMD Yogesh Aggarwal.
