Banks toe line, cut base rate

By: | Published: June 3, 2015 1:09 AM

State Bank of India, Allahabad Bank, Punjab & Sind Bank and Dena Bank on Tuesday trimmed their base rates after the Reserve Bank of India...

State Bank of India, Allahabad Bank, Punjab & Sind Bank and Dena Bank on Tuesday trimmed their base rates after the Reserve Bank of India (RBI) cut the repo rate by 25 basis points, reports fe Bureau in Mumbai. A cut in the base rate implies loans will be cheaper for all borrowers. RBI governor Raghuram Rajan had observed earlier in the day that he expected a substantial transmission of the cut in the policy rate. While most lenders have been gradually reducing deposit rates over the past seven to eight months to be able to bring down the cost of funds, the transmission thus far has been relatively small.

On Tuesday, SBI cut its base rate by 15 bps, Allahabad Bank by 30 bps and Punjab & Sind Bank and Dena Bank by 25 bps each. Although the RBI has brought down the repo by 75 basis points since mid-January, banks have been reluctant to lower loan rates given the poor demand for credit.

Credit growth in FY15 hit at a two-decade low at sub-10% while deposits grew at a 50-year low of 11.4%. Banks are reluctant to lower deposit rates given the competition from small savings schemes; SBI has dropped the interest rate on a one-year deposit to 8%, significantly lower than that offered by rivals HDFC Bank and ICICI Bank. The bank has lowered its loan rate by 30 bps over the last one year while reducing the deposit rate by nearly 100 bps.

Top- rated companies have been tapping the bond markets where the cost of money is lower by 100-150 bps. A triple A-rated PSU is able to access long-term money at around 8.30-8.40% ; in contrast SBI’s base rate, the lowest in the industry, is only now at 9.70%. In FY15, companies had borrowed more than Rs 4 lakh crore through corporate bonds.

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