Borrowers stand to gain

Even while retail customers might benefit from a gradual lowering of interest rates and waiver of foreclosure charges on home loans, depositors are likely to earn lower returns on their funds parked in bank fixed deposits.

The Reserve Bank of India announced a 50 basis points cut in repo rate to eight per cent on Tuesday. This will help bring down cost of credit for borrowers, senior bank officials said.

In a bid to contain inflation, the central bank had raised the policy rate by 375 basis points during March 2010-October 2011. This lead to an increase in borrowing cost for customers, thereby leading to a slowdown in credit offtake.

According to RBI data, credit growth of public sector banks decelerated to 16.3 per cent in 2011-12, against 21 per cent in 2010-11.

To infuse liquidity, RBI recently reduced cash reserve ratio by 125 basis points.

While some bankers said that the benefit of rate cut would be passed on to customers almost immediately, some others feel it will happen with a lag effect.

According to Mr S. Raman, Chairman and Managing Director, Canara Bank, transmission of rate cut to customers should be possible in the next few weeks.

“Reduction in interest rates on advances will depend on a cut in deposit rates as the cost of deposit has increased significantly. Our asset liability committee will take a call on interest rates on lending and deposits,” he said.

Banks can expect more relief on the liquidity front from the current rate cut. The more-than-expected reduction will also trigger appetite for home loans and corporate loans, said Mr M. Bhagavantha Rao, Managing Director, State Bank of Hyderabad.

According to Mr B. A. Prabhakar, Chairman and Managing Director, Andhra Bank, the bank may take a view on reduction in interest rate by June.

Mr H. S. Upendra Kamath, Chairman and Managing Director, Vijaya Bank, said that the bank will adopt a wait-and-watch approach.

“It (rate cut) will depend on the overall liquidity in the market. It is too premature to talk about rate cut, but both lending and deposit rates will go down in tandem and not in isolation,” he said.

Keeping customer service in mind, RBI has advised banks to waive off prepayment penalty on floating rate home loans. While some banks have already waived off such charges more banks are likely to follow suit.

The likelihood of a reduction in interest rates coupled with the waiver of foreclosure charges will boost credit growth, senior bank officials said.

The central bank has also advised banks to offer a ‘basic savings bank deposit account' with certain minimum common facilities and without the requirement of a minimum balance to all their customers.

Depositors are however, likely to earn lower return on the funds parked in bank fixed deposits.

“The rate cut will help reduce cost of credit. Liquidity is set to improve thereby bringing down deposit rates,” said Mr J. P. Dua, Chairman and Managing Director, Allahabad Bank.

According to Mr Ajai Kumar, Chairman and Managing Director, Corporation Bank, the rate cut will bring down deposit rates and consequently the interest rates on advances as well.

Banks will take about three months' time to moderate interest rates on deposits, said Mr M. Narendra, Chairman and Managing Director, Indian Overseas Bank.

According to Mr M D Mallya, CMD, Bank of Baroda, the RBI has handled multiple challenges of economic slowdown, liquidity deficit and banking sector stability in the present Policy without losing focus of its ultimate objective of “price stability”. Its future guidance is as important as its current policy actions

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