Comments
The festival season is upon us but no joy for customers as they may not get any interest-rate reprieve from banks for buying cars and houses as bankers feel that interest rates will rise, albeit marginally.
High prices of property and vehicles and the rising fuel costs may also stay customers’ hand.
Borrowing costs for customers will go up in the current quarter as banks’ cost of funds is likely to increase because of tight liquidity conditions and high interest rates they have to pay depositors.
According to Rajiv Anand, President, Retail Banking, Axis Bank, “Cost of funds will go up by 10 basis points in the October-December quarter.”
He, however, did not put an exact number to how much of this increase banks will pass on to customers.
“I think, it is inevitable that some or all of that cost increase will get passed on. So, it is fair to say that cost to the borrower will go up,” he said.
Since mid-July, banks have been fighting tight liquidity conditions as the Reserve Bank of India increased the marginal standing facility (MSF) rate by 300 basis points (which was subsequently reduced by 75 basis points on September 20). According to bankers, MSF has become the effective borrowing rate for banks from the central bank. The MSF rate is currently at 9.50 per cent.
The RBI hiked the rates and introduced some conditions to suck out excess liquidity from banks, as it believed that the excess money was being used for speculation in currency markets and it had a negative impact on the rupee.
The RBI has also capped the amount that banks can borrow from it through the repo window (at 7.50 per cent). Some banks have already hiked their deposit rates to attract more deposits and tide over the liquidity crisis.
Recently, State Bank of India, the country’s largest lender, hiked deposit rates across various categories as it felt not doing so would mean losing customers to other banks.
As deposit costs rise, so do lending costs as banks try to protect their margins.
Pratip Chaudhuri, former SBI Chairman, said recently that, “lending rates are a function of deposit rates and both are likely to go up in the near term.”
Deposit growth had slowed recently as the return on deposits was lesser than the retail inflation rate. Hence, banks were left with no choice but to increase the deposit rates.
Also, among the various financial instruments available to people, they are choosing fixed deposits with a bank because of the relatively higher and secure returns.
“We are seeing that money is moving into fixed deposits,” Rajiv Anand said.
> satyanarayan.iyer@thehindu.co.in
Comments
COMMENT NOW
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.