While lenders hint at base rate cut by next review, they cite high cost of deposits as stumbling block
After RBI on Tuesday maintained status quo on key rates, some lenders indicated that they could cut base rates before the next policy review in September even as others said it would not be possible to predict the next reduction as it would depend on the cost of deposits.
KV Rama Moorthy, executive director, Bank of Baroda, told a business news channel that while credit growth is not picking up and asset quality not improving, cost of deposits has not come down as much as predicted. He added that a reduction in base rate could be possible before the next policy announcement.
“The moment we see some difference in our costs coming down, we will definitely pass it on, as we are a very important market player and any cut in our base rate will only make us more competitive,” he said.
Pradeep Kumar, managing director, State Bank of India (SBI), said the RBI’s repo rate cuts from January have already been transmitted and if the cost of deposits falls, banks will have a relook at their rates.
“You expect that if RBI changes repo rate by 25 bps, the next second banks will change the base rates by 25 bps. The governor very clearly said there will be a lag and most banks have reduced base rates by 30 bps already,” Kumar said.
RBI data showed that non-food credit growth of banks stood at 9.67% y-o-y in the fortnight ended July 10 at R65.62 lakh crore.
According to RK Bansal, executive director, IDBI Bank, cost of deposits has come down, but needs to fall further for the bank to reduce its base rate by September end.
Bankers say since the cut on deposit rates is only effective on fresh deposits, it takes at least two quarters for the bank to realise the benefit of lower cost of funds. However, with a cut in base rate, all loans become cheaper, which affects their margins immediately. Bank deposits showed a growth of 11.66% y-o-y at R88.82 lakh crore in the fortnight ended July 10, according to RBI data.
According to Kumar, although SBI has been cutting deposit rates from September last year, the bank has not heavily benefited from it since borrowers have shifted their funds from Casa deposits to fixed deposits.
“Unfortunately, in a falling interest rate scenario, retail depositors are also smart as they move their money from Casa to term deposits expecting a fall in rates. Over a period of time, when the deposits get repriced and the cost of deposits comes down, we
will be able to pass on the reduced base rates to borrowers,” he said.
At present, base rate — the lowest lending rate — of all banks stands in the range of 9.7-10%. The base rate of SBI, ICICI Bank and HDFC Bank stands at 9.7%, while for Axis Bank, it is 9.85%.
For lenders like IDBI Bank, Bank of Baroda, Union Bank of India and Punjab National Bank, the base rate is 10%.