Days after the Reserve Bank of India (RBI) said it was not finished with rate cuts but was merely waiting for data, HDFC Bank pared its base rate by a fairly large 35 basis points to 9.35%. The aggression, coming after a series of token cuts by banks of between 10-15 basis points each, could prompt the competition to follow suit since both State Bank of India (SBI) and ICICI Bank have base rates that are at 9.7%. Coming as it does at the start of the festive season, this could be HDFC Bank’s move to gain share in the retail loan market.
With this cut, HDFC Bank has now pruned its lending rate by a total 65 bps in 2015, which is almost a complete transmission of policy rate reductions by the RBI — a total 75 bps in 2015 so far. SBI and ICICI Bank have trimmed their base rate by only 30 bps in 2015 so far. Most other banks’ base rates are above 9.7%.
Arun Tiwari, chairman and managing director, Union Bank, conceded the move would pressure other lenders to reduce their rates. For our bank, we would like to wait for another policy rate cut or until we feel we have room for a base rate cut,” Tiwari told FE.
Bankers have been reluctant to cut rates since demand for credit has been very subdued. SBI chairman Arundhati Bhattacharya has observed on several occasions that although the cost of deposits had fallen over the past six to eight months, the cut in rates was unlikely to spur any meaningful demand for credit, creating some pressure on margins.
The SBI chairman had, however, suggested a revival of teaser loans for home loan customers with a view to reviving demand.
ICICI Bank reduced its bulk deposit rates on Monday by up to 30 bps while HDFC Bank now offers retail depositers just 8.2% for one-year money. Ashish Parthasarthy, head of treasury at HDFC Bank, explained the base rate cut had been possible because of the reduction in cost of funds. He added that there was a secular downward trend in interest rates. “The base rate is linked to our cost of funds and since that has come down our ALCO met today and we took an appropriate decision,” Parthasarthy said.
In its annual report for 2014-15 released last week, the RBI had noted that past policy rate cuts had not been completely transmitted into the base rates of banks. Governor Raghuram Rajan indicated in a television channel interview on Monday that the RBI is open to more rate cuts. “We have not said we are finished (on cutting rates) and we will take a view as the data allows us to do,” Rajan said.
With almost every bank betting on its retail loan book for growth as corporate loan offtake has decelerated sharply, HDFC Bank’s move could trigger a spate of rate cuts. “With the 35 bps cut, other banks will find it difficult to compete in an environment where demand is fairly low. Having said that, it is unlikely HDFC Bank will face any pressure on its margins because its assets and liabilities are better managed than most other banks. Overall, its duration of assets and the duration of its liabilities are well managed and I, therefore, see only 1-2 bps reduction in margins owing to the cut,” said an analyst at a foreign brokerage.
The banking system’s retail loan book stood at an outstanding Rs 12.13 lakh crore as of June end and has seen a healthy growth of 15% for more than two years now. This growth comes amid a deceleration of growth in the overall credit offtake to a 20-year-low of sub-10%. HDFC Bank’s retail portfolio is more than 50% of its total loan book, which was at Rs 3.82 lakh crore as of June 30. The bank’s retail loans have seen a growth of 25% year-on-year, driving its overall loan book growth.