Unlikely to cut lending & deposit rates as tight liquidity in market keeps cost of funding higher
Bankers do not see any scope for cutting either lending or deposit rates even after Reserve Bank of India?s 25-basis points repo rate cut on Friday as tight liquidity condition in the market has kept cost of funds elevated.
Repo rate, the rate at which RBI lends to banks, cut does not automatically provide banks with the opportunity to cut lending rates as it does not immediately translate benefits on their profit and loss accounts, bankers said.
?One basis point cut is much too high. There is no scope for cutting lending rates,? said State bank of India chairman Pratip Chaudhuri, adding, ?Our total borrowing under the repo window is R20,000 crore, from that if I get a redemption of 25 bps, it adds to about R500 crore. And the total advances which are linked to the base rate are R50,000 lakh crore.?
Chanda Kochhar, CEO and MD of ICICI bank, said, ?The scope for cutting lending rates comes from cost of funds only. If the cost of funds goes down then every bank can either cut the base rate or more aggressively cut rates for specific sectors.?
The scope for cutting lending rates is curtailed further as deposit growth in the banking system has been slow not letting banks cut deposit rates to bring down their cost of funds. ?If the government spends money and liquidity comes, and if the total liquidity in the system is not tight then you will see the market mechanism evolve. Then you will see the deposit rates coming down,? said Aditya Puri, MD of HDFC Bank.
Kochhar said deposit growth has not improved significantly, which is an added pressure to tweak the rates on either sides.
Non-food credit rose 14.4% year-on-year (y-o-y) to R51,93,676 crore for the fortnight ended April 19. Deposit growth for the same period continued to be modest at 13.2% y-o-y, RBI data show. RBI has targeted a 15% credit growth and 14% deposit growth in the banking system for FY14.
Bankers said cash reserve ratio (CRR), which was kept unchanged by RBI at 4% in the latest policy announcement on Friday, would have helped immediately translate the benefit to the customers and infuse liquidity.
?Market should have been much more liquid than it is and preference for going for OMOs compared with a CRR cut I think will work against the rationale for cutting rates,? said Romesh Sobti, the managing director and CEO, IndusInd Bank.
Even cooling of rates in certificate of deposit (CDs), a fixed-deposit investment option offered by banks and lending institutions, since March this year would not hit the rates immediately.
?The fact is that liquidity is tight, and CDs have come down, they have come down from a peak,? said Sikha Sharma, Axis Bank MD and CEO.
SS Mundra, Bank of Baroda CMD, said lending on the corporate side will not improve even if the bank cut rates and on the retail side, specifically housing and auto loan, the current rate has generated enough demand.
