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There is room for a 25-50 basis point reduction in lending and deposit rates in the next one year, say bankers.
The next round of lending rate cuts will depend on Reserve Bank of India’s action on policy rates and liquidity of the banks.
“Shorter end rates cannot go down as long as the operative policy (repo) rate is steady at 8 per cent. The system needs to see rate cuts bring down the Base Rate,” said Moses Harding, Head, ALCO and Economic and Market Research, IndusInd Bank.
Given the weak macroeconomic environment, investments are currently subdued and lenders are reluctant to take significant risks. There is enough liquidity, but there is no appetite to invest or lend. This vicious cycle has to be broken to improve credit off-take, Harding said.
Since banks have enough liquidity, there is a strong possibility of a cut in lending rates to improve credit growth, say bankers.
According to K.V.S. Manian, President, Consumer Banking, Kotak Mahindra Bank, lending rates are headed downwards in the next 12-18 months.
On a year-on-year basis, non-food bank credit growth fell to 15.9 per cent in September 2012 compared with 18.7 per cent in September 2011, according to RBI.
Bankers feel that deposit rates might be slashed or, at best, remain at current levels over the next six months.
“Deposit rates have remained sluggish in the last 12 months. We see the rates dropping further in the same range as lending rates,” Manian said.
“We expect the deposit rates to head southwards in the next 6-12 months. At present, banks are not aggressively contracting deposits for more than 12 months, otherwise they will not be able to adjust them to lending rate changes on a real-time basis,” said a General Manager (Treasury) of a public sector bank.
However, according to D. Sampath, Additional Manager and Head-Retail Business, Federal Bank, the credit off-take has improved with some banks cutting their lending rates.
“Further, not-so-encouraging factory output numbers might force the RBI to cut key policy rates. Post policy rate cut, I expect banks to cut lending rates by at least 25 bps. Deposit rates may stabilise in the year ahead,” Sampath added.
S. Govindan, General Manager, Personal Bank Operations Department, feels that one year term deposit rates are definitely easing.
“The interest rates on deposits which have been over 9 per cent and above have been slashed.
“They will stay in the 8 per cent range for some time. Credit growth is showing a slow upward movement,” Govindan said.
> satyanarayan.iyer@thehindu.co.in
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