Lending rates to fall, deposit rates to hold, say bankers

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Summary* IDBI Bank, National Housing Bank slash lending rates by 0.25%

Taking a cure from the Reserve Bank policy announcement, Mumbai-based IDBI Bank slashed its lending and deposit rate by 0.25 per cent, just hours after the banking regulator cut key rates. The National Housing Bank (NHB) had, earlier during the day, announced a cut in lending rates by 0.25 per cent, which is expected to benefit home loan borrowers.

With others slated to follow, lending rates are set to head downwards as bankers appear near unanimous in their resolve to pass on the benefits of rate cut by the RBI to their borrowers. Deposit with banks may, however, continue to fetch similar returns as there has been a deceleration in the growth of aggregate deposits and banks may continue to offer higher rates to push it up.

“The indication from all bankers is that there will some transmission on the lending rates and on deposit rates we are going to watch the situation,” said Chanda Kochhar, MD and CEO, ICICI Bank.

IDBI Bank has, however, reduced retail term deposit rates only for select buckets. NHB has reduced its prime lending rate from 10 per cent to 7.5 per cent with immediate effect, it said in a statement.

D Subbarao, Governor, RBI said that the banks have assured the regulator that the loan rates would be brought down through a cut in the base rate and bankers maintained that their Asset Liability Management Committee (ALCO) will meet soon to take a call on lending and deposit rates.

“Banks have an urgency to increase their credit growth, so they will be looking at all opportunities, either through reducing base rate or some segments where they can lend better,” said Pratip Chaudhuri, chairman, SBI adding that the bank’s ALCO will meet on Wednesday.

Aditya Puri MD, HDFC Bank said there will be monetary transmission happening.

Earlier, RBI announced a cut in the rate at which it lends to the commercial banks by 25 basis points (100 basis point is 1 percentage point) and also brought down the reserve requirement by 25 points from 4.25 per cent to 4 per cent thereby infusing an additional Rs 18,000 crore into the system. Both the measures will help reduce the cost of funds for banks.

While some banks have been quick in taking their call, there are others who feel that a cut is tough now and the situation may get fully revealed only in February.

SL Bansal, CMD of the Oriental Bank of Commerce said, “It would depend on the ALCO decisions of individual banks on whether the reduction would come immediately or in a week or two,” he added.

The Indian Overseas Bank said that there is a clear case for policy transmission on lending rates by banks but said that it would be challenging.

M Narendra, CMD, IOB, said, “It will be a challenge for banks to pass on the benefit of the rate cut to push growth and consumption demand without impacting the already slowing deposit growth.”

Punjab National Bank was, however, of the view that economic growth is the need of the hour and hence benefits have to go to the critical areas.

“Today if we are looking at growth in this country fresh investments have to happen. When we said transmission has to happen, it includes other segments like infrastructure and small and medium enterprises,” said KR Kamath, CMD, Punjab National Bank.

Home loan rates set to come down

Home buyers and existing home loan customers can expect some cheer as banks and housing finance companies are looking to pass on the benefits of a CRR cut to customers.

A cut of 25 basis points in the home loan rates would mean the tenure of home loans or EMI’s coming down. For new customers, a 25 bps cut in rates means that for a 20 year home loan the EMI will go down by Rs 17 for every Rs 1 lakh of loan.

Banks and housing finance companies are offering 20-year home loans at 10.5 per cent currently, which is set to go down to 10.25 with the RBI’s move.

A revision by banks in their base rates may also provide some relief to old customers.

“Our Assets Liability Management Committee will sit and examine as to what extent and to what percentage, benefits can be passed onto the customers,” said VK Sharma, director and chief executive, LIC Housing Finance. When asked if the revision will only be for new customers, he said, “We will review the PLR and the benefits will be passed to all.”

The head of another housing finance company said banks will have to first cut the base rate for benefits to be passed on to the existing customers. ENS

Mint street signals

ON MORE RATE CUTS:

If inflation eases further and the current account deficit moderates, then there will be room for monetary easing

NEW BANK LICENCES:

It’s in the final stages. We’ve responded to the government’s suggestions. We are awaiting the government’s response

GDP GROWTH: The decline in the GDP growth rate

became more broad based, with consumption demand also slowing alongside stalling investment and declining exports

THE BIG RISK: The widening of the current account deficit to historically high levels, especially in the context of a large fiscal deficit and slowing growth, exposes the economy to the twin deficit risk

WHAT ECONOMY NEEDS: What the economy needs most of all and most urgently is new investment. This will step up currently flagging aggregate demand and also ease the supply constraints so that existing capacity is fully utilised and new capacity is built up.

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