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Amid the slow credit offtake and lowering cost of funds in the banking system, HDFC Bank — the country’s second-largest private bank — slashed its base rate, or minimum lending rate, by a sharp 35 basis points to 9.35 per cent, effective September 1.
This could set off a rate cut war among lenders to retain customers. HDFC Bank’s new base rate will be the lowest in the banking industry.
Among public sector banks, Canara Bank also cut its base rate by 10 bps to 9.9 per cent, effective September 3.
Third revision this year This is HDFC Bank’s third revision this year. The lender had last cut its base rate by 15 basis points to 9.70 per cent from 9.85 per cent. And prior to that in April, it had reduced its base rate by 15 basis points from 10 per cent.
At present, the base rate of country’s largest lender State Bank of India and ICICI Bank, the country’s largest private bank, are at 9.70 per cent each.
The base rate is the benchmark rate to which all other lending rates are linked.
Ashish Parthasarthy, Head of Treasury at HDFC Bank, said: “We have significantly reduced our deposit rates and this revision in base rate follows that… And base rate as a formula is linked to the cost of funds which has been coming down. So, today our Asset Liability Committee met and decided to reduce the rate.”
In the last two months, HDFC Bank’s deposit rates have come down between 25-50 basis points. The reduction could impact its net interest margins in the short term.
Parthasarthy said the downward trend in the interest rates will continue and the bank will try to maintain its margins in the current range of 4.2-4.6 per cent over a period of time.
Since January, the RBI cut the key policy repo rate by 75 bps. However, banks did not proportionately reduce their lending rates. So far, they cut the base rates in the range of 25-30 bps.
In its Annual Report, RBI hit out at banks saying that, “The willingness of banks to cut base rates – whereby they forego income on existing borrowers in order to attract more new business – is muted.”
Meanwhile, Axis Bank, the country’s third-largest private bank, cut the deposit rates 20-50 basis points across all tenures, applicable from September 1. Usually, a revision in deposit rates is followed by a revision in the lending rates as well.
Previously, Axis Bank had cut the deposit rates in June, a day after the RBI cut the key policy rate.
The bank had cut its base rate by 0.20 per cent in April to 9.95 per cent after the RBI Governor nudged banks to cutting interest rates.
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