Banks not for immediate hike in lending rates
Concerned over deposit growth falling below the projected line, the Reserve Bank of India (RBI) has asked banks to beef up deposit mobilisation to avoid any asset-liability mismatch.
“Money supply (M3) growth on a year-on-year basis moderated from 16.8 per cent at end-March 2010 to 15.3 per cent as on July 2, 2010, reflecting a slowdown in growth in bank deposits. Time deposits decelerated mainly because of withdrawal of deposits by public sector undertakings and mutual funds,” RBI said.
Non-food credit growth, on the other hand, accelerated from 17.1 per cent in March 2010 to 22.3 per cent as on July 2, 2010 — higher than the indicative trajectory of 20 per cent.
Deposit growth has been slack on account of unattractive rates, which have been in the negative territory since the beginning of the year as inflation started rising.
Between March and July, banks increased their term deposit rates by 75-100 basis points. According to bankers, they are unable to offer higher deposit rates as it will dent their net interest margins. Bankers do not see any immediate hike in lending rates, as real credit pick-up is yet to take place.
“By and large, lending rates will not go up in the second quarter of the current financial year,” said O P Bhatt, chairman, State Bank of India while addressing the press.
With shortfall in liquidity expected to ease over the next couple of weeks and a broad-based credit growth yet to take hold, bankers say there is no immediate pressure on lending rates.
“Already, you are seeing an increase in wholesale deposit rates for the short term. But we have to see what happens to liquidity once the huge redemptions that are due in July take place. Also, government spending is yet to pick up, which will result in some kind of tightness,” said Chanda Kochhar, managing director and chief executive officer of ICICI Bank.
Bankers, however, feel that there has been an upward bias towards interest rates. “A lot of it is public posturing. The point is competition is forcing all of us to hold back a hike. Everyone is waiting for the other bank to make the first move. You will see most banks raise rates over the next three-six months,” said the chairman and managing director of a leading public sector bank.
“Some upward bias in interest rates has been built up and with what has happened today, the bias has increased. Had they increased the CRR (cash reserve ratio), the bias would have become very tight. Banks who are in a constrained position may take a call on deposit rates,” Bhatt said.
Bankers said they were concerned about the slow growth in deposits and might be prompted to increase deposit rates in the future.
“The area of concern is deposit growth, which is much below expectations. This is what is putting pressure on liquidity and in case deposit growth does not increase from what it is today, which is 14.9 per cent, there is every need that deposit products will have to be made more competitive,” said M V Nair, chairman and managing director of Union Bank of India.
Deposit rates are likely to rise before lending rates, according to Shikha Sharma, managing director & CEO, Axis Bank.
“Last time, when the first policy change happened, we saw a spurt in credit demand. A part of slowness in credit demand is because people see ample liquidity and do not see the need to stock money. So, rising interest rates will somewhat counter-intuitively lead to an increase in credit demand,” said Sharma.
