Despite Reserve Bank of India (RBI) Governor Raghuram Rajan using strong words against bankers for not passing on two rate cuts to borrowers...
Despite Reserve Bank of India (RBI) Governor Raghuram Rajan using strong words against bankers for not passing on two rate cuts to borrowers, lenders stuck to their guns saying their cost of funds is too high to lower rates, which they see happening over the next two-three months.
“Between April and June, we see a repricing of deposits, which can help us get low cost funds and which in turn can help us lower our lending rates,” bankers told reporters at the customary post-policy press conference at RBI here today.
The comments came within hours of Governor Raghuram Rajan dismissing the bankers’ alibi of high cost of funds for not cutting their lending rates as “nonsense”. He hoped that easing liquidity this month will force them to slash lending rates.
“Their (banks’) marginal cost of funding (has) fallen; the notion that it hasn’t fallen, is nonsense, it has fallen!,” Rajan said in strong remarks against the lenders for not effecting monetary transmission despite sitting on mounts of liquidity.
When sought a response to Rajan’s angry reaction, SBI Chairman Arundhati Bhattacharya said, “You have to understand both ways, it takes a little time for the things to pass through.
“And, it is not only the cost of deposits that determines this, the passing through is also determined by the amount of liquidity, the amount of credit demand and competition which also drives rates up or down. There are very many factors and repo is only one of the factors.”
She further that while fixing deposit rates banks are fixed on the liability side in the sense that when we take a deposit we take it a particular cost. And, therefore to reprice it we have to ensure our asset base on the basis of marginal costing itself it would be something that if we even think about doing it, it will have to have a very long transition period.
It can be noted that after the two unscheduled cuts to the tune of 0.25 per cent each on January 15 and March 4, only two small banks — United Bank and State Bank of Travancore — have cut their lending rates.
“It can’t happen tomorrow. This means that when rates go down depositors will start getting much less and when the rates go up the borrowers will have to pay much more,” Bhattacharya argued.
She was, however, quick to add that “because it is an easing cycle, internally we believe that inflation will come down and our inflation prognosis is lesser than what RBI has given today. Given the easing cycle, the rates are definitely going to come down.”
She also said that their asset liability committee will be meeting this week to take a call on rates.
HDFC Bank’s Aditya Puri chipped in saying base rate cut is a function of the deposit cost.
“If the deposit cost goes down, then there will be a base rate cut. If it doesn’t there won’t be any base rate cut. However, we feel between now and June, there should be repricing of cost and that will lead to a lower cost of funds for borrowers,” he said.
ICICI Bank’s Chanda Kochchar also supported the SBI chief saying it not just the repo rate change that determines the base rate change, it depends on cost of funds, deposit mix, liquidity situation and also on credit off take.
However, Bank of India chairperson Vijaylaxmi Iyer said, “the impact of reduction in cost of deposit experienced during the last quarter will encourage banks to pass on the benefit to customers. Retail borrowers may see lower EMIs.”
But, she did not specify how soon that may happen.
On the issue of bad loans, bankers lobby IBA chairman and Indian Bank head T M Bhasin said the lenders are optimistic that coming quarters will be better than the past few years, while other bankers refused to specify saying this is the silent period.