The Hindu Business Line : Banks may reduce lending, deposit rates

Mumbai, Oct. 20 Banks may reduce their lending rates, both corporate and retail, after the Reserve Bank of India cut the repo rate by 100 basis points, on Monday.

According to bankers, this move by the RBI is a signal of a softening in interest rates. Bankers said while they will definitely consider reducing interest rates, they would wait and watch before announcing the actual rate cuts.

Repo rate is the short-term rate at which RBI lends to banks. It is now 8 per cent, down by 100 basis points.

Passing benefits

While banks would pass on the benefit of the reduction in their cost of borrowing to borrowers by cutting lending rates, depositors should also be prepared for a reduction in deposit rates.

Mr T.S. Narayanasami, Chairman and Managing Director, Bank of India and Chairman, Indian Banks’ Association, said interest rate softening should happen as a logical corollary to the RBI move. “We are eager to pass on the benefit to borrowers, because at current rates lending is not viable. But unless we see market rates falling structurally, we cannot revisit deposit and lending rates.”

The RBI move, in both timing and magnitude, was unexpected and has clearly sent a strong signal that it is looking at making credit available at affordable rates, said Ms Roopa Kudva, Managing Director and Chief Executive Officer, Crisil.

The policy response indicating emphasis on growth could pose some slight risk to inflation, but it is not material, she pointed out.

Likely cuts

About likely rate cuts by banks, Ms Kudva said, “While it will have an impact on pricing by banks, it will depend on each bank’s asset size and pricing structure. It will be on a case-to-case basis.”

The extent by how much banks would cut their lending rates will depend on customer profile, asset mix, liability mix and tenor of their loans, Ms Kudva added.

A senior official from State Bank of India said interest rates have to come down, as the hint has been given by RBI. “We will have a look at it and take an appropriate decision. But if rates on advances are cut, deposit rates will also go down,” he said.

Impact awaited

Ms Chanda Kochhar, Joint Managing Director, ICICI Bank, said the repo cut is a welcome move by RBI and signals its focus on ensuring sufficient liquidity and smooth functioning of financial markets to support growth.

Some banks such as the Union Bank of India and Punjab National Bank announced a cut in housing rates as part of the festival offer, after the RBI eased liquidity by cutting CRR by 150 basis points and reduced banks’ borrowing costs by cutting the repo rate by 100 basis points.The Chairman and Managing Director of Corporation Bank, Mr B. Sambamurthy, said that the RBI’s decision should encourage the banks to have a re-look at the interest rates.

Asked if Corporation Bank will reduce interest rates, he said the bank has already reduced interest rates on home loans and vehicle loans as part of festival bonanza. “We will wait for the RBI policy review on October 24, before taking further steps,” he said.

‘Expected move’

Mr Ananthakrishna, Chairman and Chief Executive Officer of Karnataka Bank Ltd, said that repo rate cut was an expected move. The banks borrowing from RBI will have some kind of relief with this move as they will get funds at a cheaper rate.

Asked if Karnataka Bank has any plan to cut interest rates, he said: “No immediate plans as such in this regard. We have to see what measures RBI takes on October 24. Only after that we can think about it.”

To a question, he said the bank has enough securities available to use the repo window.

The repo rate cut is a welcome measure and indicates that interest rates should either stabilise or gradually start moving down, according to Mr K.R. Kamath, Chairman and Managing Director, Allahabad Bank.

The interest rates on bulk deposits have been ruling high, he observed. “If banks can reduce interest rates on bulk deposits, then our cost of funds will come down. This can then be passed on to the customers,” he pointed out.

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