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C. Shivkumar

Bangalore, Nov. 5 Banks have cut their bench mark prime lending rates (BPLR) by at least 75 basis points; but there is little cause for euphoria.

BPLRs are down to 13.25 per cent. However, bankers said that the return to steep discounted lending rates are unlikely to be revisited in the near future. In 2004-2005, the banking system had witnessed corporates borrowing at discounts as high as 500 basis points below the BPLR. During the same period, the spreads between sovereign and Triple “A” corporate borrowings were barely 75 basis points. Currently, the spreads are close to 600 basis points. In fact, most corporates are borrowing at BPLR or above it. The Vijaya Bank’s Chairman and Managing Director, Mr Albert Tauro, said: “Some reduction in rates will take place, so will borrowing costs. But steep discounts are unlikely, unless there is a substantial improvement in the liquidity situation.”

Besides, the current situation is a complete reversal of what existed two years ago, when corporates had alternative avenues for funds in the form of external commercial borrowings. These funds are no longer available at present.

Moreover, credit offtake also remains high. According to the Reserve Bank of India, this fiscal year, credit expanded by 29 per cent on a year-on-year basis. Credit since the beginning of this financial year was Rs 2.45 lakh crore translating to a credit to deposit ratio of 90 per cent.

Bankers said that the Rs 1.80-lakh crore release of the Cash Reserve Ratio (CRR) in October alone had somewhat alleviated the tight liquidity situation. Deposit accretions also remained high. Time deposit accretions since the beginning of this financial year amounted to Rs 3.08 lakh crore as against Rs 2.72 lakh crore during the corresponding period of the last financial year.

Bankers said that bulk of these funds were largely on account of reverse disintermediation. This implied that funds that had fled from the bank deposits to the equity markets were now returning. Accordingly, the bankers said that there was scope for reduction in deposit rates in the coming weeks.

In fact, bankers said that among the first casualties were likely to be the special deposit schemes launched by various banks offering rates of interest as high as 11.5 per cent. “These rates will come down, since depositors are flooding public sector banks,” a PSU banker said.

Bankers expect the deposit inflows to remain unaffected even if rates are dropped by as high as 150 basis points.

This is in view of corporates shifting some of their cash reserves from mutual funds to bank time deposits. As a result, bank bulk deposit accretions have remained high.

The PSU banker said, “These funds will keep coming to us even if we continue lowering rates. The days of high interest rates on bulk deposits are unlikely to revisit us in the near future.”

More Stories on : Credit Market | Interest Rates

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