Banks will first cut deposit, then lending rates

Those looking to invest money in bank deposits must be prepared for a cut in deposit rates. Following the 50 basis points cut in repo rate by the Reserve Bank of India, banks are likely to cut deposit rates, shortly.

A cut in lending rates would follow once the cost of funds comes down, said bankers.

Speaking to newspersons after the announcement of the monetary policy, bank chiefs said while the RBI's step indicates a downward bias in interest rates, it is too soon to predict how soon the transmission would happen and by how much.

Mr Pratip Chaudhuri , Chairman, State Bank of India said the rate cut would be passed on, though there would be not be an across the board cut in lending rates.

“It (the rate cut) will be particularly for those segments where the mark up over the Base Rate is significant. Largely, in our case, it would be for the SME sector. Segments where the lending rates are 15-16 per cent will get a relief,” he said.

A cut in deposit rates is absolutely required otherwise cost of funds for banks will not go down, said Ms Chanda Kochhar , MD and CEO, ICICI Bank.

Mr Aditya Puri , MD, HDFC Bank, said that the cut in deposit and lending rates will be in equal measure, by and large.

Impact on margin

About the impact on banks' margins, Mr K. R. Kamath, Chairman and Managing Director, Punjab National Bank, said that margins will continue to be under stress. “A repo rate cut does not bring down the cost in any way. It is a signal. Based on that, if you are in a position to reduce the deposit rate, then the cost comes down. You need to first bring down the cost and then pass it on to borrowers.”

Credit-deposit growth targets

While banks would be able to meet the credit target, deposit growth would be a challenge this year, said bankers.

Ms Kochhar said that the target of 16 per cent growth in credit is more-or-less in line with last year's target and looks achievable.

“The credit growth was mainly from housing loan, car loan, commercial vehicle loan, and working capital. New projects growth is muted. Past projects are still continuing. So disbursements against past projects are also growing,” she said.

Deposit growth will depend on the competing products available and the rates on those products, she added.

There would be demand for credit from farmers as there has been a bumper crop of cotton, wheat and rice and also from public sector undertakings which would roll out their investment plans. However, deposit growth would get crowded out by other competing savings schemes. Not because their pricing is better but because their tax treatment is superior, said Mr Chaudhuri.

Mr Puri also said that deposits are not growing at a rate that is good for the banking system. But if government spending comes into the system, then deposits may grow, he added.

Bulk, retail deposit rates

About the RBI's suggestion that the variation in bulk and retail fixed deposit rates should be minimal, Mr Chaudhuri said that just like in loan rates, in deposit rates too a high value customer always expects a premium and that has to be respected.

“It will be a function of each bank separately. It will depend on which bank has the need and at what point of time it is inclined to give a rate on bulk deposit. It is difficult to prescribe a stance for all times to come. Higher the deposit greater is the premium expectation and possibly rightly so,” he said.

Gold loans

About the RBI putting a ceiling on banks' exposure to gold lending NBFCs, Mr M. D. Mallya, CMD, Bank of Baroda, said the concern is that exposure of banks to NBFCs dealing with gold loans has gone up substantially in the last two to three years.

Whether this move would really have an impact as far as lending is concerned, it depends on each bank's exposure, he said.

According to Mr Chaudhuri, huge gold imports are one of the contributory factors for the high current account deficit. So the RBI is trying to figure out how to curb consumption of gold and one of the ways to do this is to make it less attractive as collateral.

“They are possibly signalling that this is not very productive. I would not be surprised if more such steps are in the offing to curb lending against gold because it does not add to output. It does not add to jobs, taxes, and is not very productive for economy,” he said.

> priyan@thehindu.co.in

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