First it dealt banks a body blow by upping the interest rate on the Public Provident Fund (PPF) and the investable limit to R1 lakh per annum. Now, media reports say the government insists banks cut loan rates. The government has refuted this, saying that it has merely asked banks to re-look at their lending rates following the cut in the repo rate by 50 basis points to 8%. But one public sector bank has already cut its base rate, so it?s possible there?s some kind of moral suasion at work. ICICI Bank, too, has trimmed its base rate by 25 basis points to 9.75%. As has been pointed out in editorial columns across newspapers, the Reserve Bank of India (RBI) has done more than it was expected to by cutting the key repo rate by 50 basis points to 8%. Despite harbouring concerns on inflation, the central bank took a chance with a bigger cut because it believes monetary transmission will be more effective than it might have been had the repo rate been trimmed by just 25 basis points.
The central bank could well have waited till the government delivered on some of its commitments made in the budget?adjusting prices of fuel, for instance?and also till the monsoon set in given that food inflation is soaring. But it chose to give the government the benefit of the doubt, taking its promises at face value even though the mess that the country finds itself in today is entirely of the government?s making. What does the government do in return? Try to push public sector banks into cutting lending rates.
For sure, quick monetary transmission is desirable; banks, too, want to be able to make loans affordable for customers so that they are able to do more business. But they should be in a position to do so. For several months now, the money markets have been short of liquidity?the deficit in liquidity averaged R1.14 lakh crore in the second half of 2011-12. As a result, banks have been compelled to borrow at very high rates in the wholesale market?three-month Certificates of Deposits (CDs) have fetched as much as 10.25%. RBI has tried to make life easier for banks by lowering the CRR by 125 basis points to 4.75% and buying bonds worth R1.3 lakh crore, and the pressure on bulk rates has eased.
This has, no doubt, freed up some liquidity for the banks?R80,000 crore for the system and RBI is hoping that this would help further monetary transmission. Essentially, banks could lend this money at lower rates and still be better off since they earn virtually nothing on CRR balances. But, the bad news is that banks aren?t able to mop up the kind of deposits that they would have liked to?deposits in the six months to March 2012 increased by just 3% over the base at the end of September 2011, the lowest half-yearly growth in the last decade. That left aggregate deposits with banks at R63,14,400 crore at the end of March, 2012, compared with R55,81,600 crore at the end of 2010-11. If banks are to lower their base rates?the minimum rate below which they cannot lend?they would need to lower their borrowing costs to be able to maintain their spreads. But if they lower deposit rates, it?s possible that savers will switch to savings instruments, which, as the State Bank of India (SBI) chairman has pointed out, offer tax breaks.
After all, how many people are there in this country who are able to put away more than R8,000 a month? That means the growth in deposits this year could turn out to be more subdued than it was last year, when the loan-deposit ratio touched a near all-time high of close to 77% at the end of March from 74% six months in September. Clearly, this ratio needs to come off and deposits need to grow faster than loans. Right now, deposits are growing at around 14%, while the run rate for loans is 16.5-17%. In one fortnight, deposits grew at 13.4% y-o-y, an eight year low. Nonetheless, banks seem to be willing to give it a shot. Punjab National Bank has lowered deposit rates by 25 to 50 basis points while ICICI Bank has pruned the interest rate on retail deposits by 25 basis points. If households do park less of their savings with banks, and deposits grow by about 14% on last year?s base, that would translate into less than R10 lakh crore, leaving about R7 lakh crore for banks to lend. The current base is approximately R46 lakh crore, which means loan growth is unlikely to exceed 15%, compared with 17% last year. That cannot be good news for banks looking to grow their balance sheets.
Indeed, money is expected to remain in short supply for the better part of this year, with the government looking to mop up a gross R5.7 lakh crore. Unless RBI supports the market by buying back bonds yields on the benchmark, bonds are likely to spike once again, perhaps not to the highs of 8.8% that we saw recently, but back to 8.65% levels. Looks like RBI is going to be busy managing yields.
shobhana.subramanian@expressindia.com
