1. Banks get on board, cut lending rates

Banks get on board, cut lending rates

To lower deposit rates as well to compensate

By: | New Delhi | Published: October 1, 2015 1:10 AM
Led by SBI, bankers have been trimming deposit rates since late last year in readiness for rate cuts. (Reuters)

Led by SBI, bankers have been trimming deposit rates since late last year in readiness for rate cuts. (Reuters)

Loan rates across banks are coming off after State Bank of India (SBI) cut its lending rates by 40 basis points (bps) to 9.3% on Tuesday, with a clutch lenders including Bank of Baroda, Axis Bank, IDBI Bank and Punjab National Bank lowering their base rates by anywhere between 35 and 40 bps. While this will cheer borrowers — whether companies or individuals — most lenders are likely to reduce deposit rates. SBI, for instance, will pay 25 bps less on deposits of certain maturities from October 5. On Tuesday, the Reserve Bank of India (RBI) lowered the repo rate by 50 bps to 6.75%, saying inflation was easing as projected.

Led by SBI, bankers have been trimming deposit rates since late last year in readiness for rate cuts. But they are apprehensive of offering too low a return on deposits given small savings schemes now fetch far more attractive rates. The Sukanya Samriddhi scheme, for instances, offers a return of 9.2%, while the PPF scheme fetches 8.7%.
In contrast, several banks are now offering customers less than 8% for one-year money and not much more for two-year deposits. Deposit growth has slowed considerably over the past couple of years — deposits grew 11.26% to Rs 89.59 lakh crore in the fortnight to September 18.

Banks are also loath to cut loan rates too much as that could hurt margins at a time there’s likely to be little incremental demand after the cuts, especially from companies.

A cut in the base rate results in a fall in the interest rate for all borrowers. SBI chairman Arundhati Bhattacharya said her bank was front-loading the base rate cut of 40 bps hoping it would stimulate demand.

RBI data show that non-food credit grew 9.81% year-on-year in the fortnight to September 18 to Rs 66.03 lakh crore. Companies have been accessing the commercial paper market, where rates are substantially lower, for their short-term working capital needs. However, with larger banks taking the plunge, smaller lenders like State Bank of Travancore and UCO Bank have had no option but to follow suit.

Charan Singh, executive director, UCO Bank told a business news channel his bank would definitely witness pressure on margins. Singh added that if demand for loans picked up, the bank could look at further rate cuts. UCO Bank trimmed its base rate by 25 bps on Wednesday following a similar cut in May.

Base rates now range between 9.3% and 10% ; while the RBI has lowered the key repo rate by 125 bps since January to 6.75%, banks have passed on a maximum of 70 bps.

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