A likely cut in the Reserve Bank of India’s key repo rate on Wednesday and outflows in banks’ low-cost deposit accrued on account of demonetisation could prompt more banks to cut deposit rates as well as the marginal cost of fund-based lending (MCLR) rates in the coming days. In a surprise move on Monday, the country’s largest lender State Bank of India (SBI) reduced the interest rate on savings deposits of less than Rs 1 crore to a six-year low of 3.5% from 4% and said large outflows in deposits that had come in due to demonetisation made it difficult for the bank to maintain its MCLR at the current levels.
SBI had cut its MCLR by 90 basis points to 8% in January on the back of large inflows in savings and current accounts during the demonetisation period in November and December 2016. About 60% of these deposits have moved out, the bank said. “The lower rate would have a 15 basis points benefit on the bank’s margins (other things remaining the same). We expect most other banks to follow as well; the benefit could be 5-15 basis points,” Morgan Stanley Research wrote in a note on Tuesday. With loan growth in the Indian banking sector at multi-decade lows, it would be extremely difficult for banks to increase their lending rates. Latest data from RBI show banks’ non-food credit grew merely 7.26% on a year-on-year basis at the beginning of July.
The revision in SBI’s savings bank rate would enable the lender to maintain the MCLR at the existing rates, benefiting a large segment of retail borrowers in the SME, agriculture & affordable housing segments, Rajnish Kumar, managing director, had said.State-run banks such as Bank of Baroda, Union Bank and Bank of Maharashtra are also considering cutting their deposit rates. Historically, most public sector banks have matched rates set by SBI.
“We believe that other banks may follow suit as the liquidity in the system continues to remain high amidst a tepid loan growth environment. Other factors remaining constant, such moves are likely to boost bank NIMs,” Bank of America Merrill Lynch said in a note. RBI’s Monetary Policy Committee is largely expected to cut the repo rate by 25 basis points to 6% on the back of a sustained fall in retail inflation. Consumer price inflation fell to a record low of 1.54% in June, lower than May’s 2.18%. A cut in the key repo rate could prompt the banks to pass on the benefits to their customers through a reduction in the MCLR.