Mumbai: IDBI Bank Ltd on Wednesday pared its loan and deposit rates, a day after the Reserve Bank of India (RBI) cut its policy rate by 0.50%, sending a strong signal to banks to bring down cost of money.
No other bank announced any rate cut till the press time. On Tuesday, most of them said the cost of deposit is high in the system and they will be able to cut their lending rates only after the deposit rates come down.
The Indian central bank cut its repo rate, or the rate at which it injects liquidity into the banking system, by 0.50% to 8% and RBI governor D. Subbarao, at a post-policy interview with Mint, said the rate cut was larger than market expectation to send a stronger signal on monetary transmission.
“In fact, one of the considerations between a milder policy rate action and what you consider a more decisive action is the impact it will have on transmission,” Subbarao said on Tuesday.
A day after RBI cut the repo, IDBI Bank has pared its loan and deposit rates. But Mint’s Anup Roy says t could be a while before other banks follow suit
IDBI Bank cut its minimum lending rate, or base rate, by 0.25% to 10.50%. It also cut interest rates by 10-50 basis points (bps) for deposits maturing in six months and above. One bps is one-hundredth of a percentage point.
The bank will now offer a maximum 9.25% for deposits maturing between 500 days and five years.
Larger banks are inclined to buy time before they come with a rate cut decision.
State Bank of India (SBI) chairman Pratip Chaudhuri said in a statement the policy rate cut will soften the interest rate environment “in due course”. “The actual reduction in rates on loans and advances will depend on the bank’s (SBI) ability to realign deposit rates and enable it to pass on the benefits to borrowers,” he said.
Banks had to hike the deposit rates owing to the liquidity deficit caused by RBI’s dollar selling in the market. For each dollar the central bank sells, it sucks out an equivalent amount of rupee from the market. This way, RBI sucked out Rs 1.3 trillion worth of liquidity from the banking system.
“We propose to examine all components of our assets and liabilities and bring about suitable changes to usher in a softer interest rate regime. As and when liquidity eases across the banking system, affording scope for a downward revision of rates on deposits, a revision in the base rates of banks will ensue,” Chaudhuri said.
Bank of Baroda chief M.D. Mallya said there is a possibility of rate cut, but the bank’s asset liability committee has to meet to take a call. The committee will meet in two days.
Paresh Sukthankar, executive director HDFC Bank Ltd, said his bank’s base rate is lower than IDBI Bank even after this cut (at 10% versus 10.50% of IDBI). “We cannot lower our lending rates unless we drop our deposit rate first. It is only after larger banks take a call on dropping deposit rates, we will move. We are all watching each other in the market,” he said
Analysts don’t blame banks for their reluctance to pare rates.
Even though RBI injected about Rs 80,000 crore of liquidity through its 1.25% cut in cash reserve ratio in the past few months, the liquidity shortage in the banking system has not improved substantially. On Wednesday, banks borrowed at least Rs 1 trillion of overnight money from the central bank. The overnight call money rate was 8.35% on Wednesday, higher than the repo rate of 8%.
Jammu and Kashmir Bank Ltd on Wednesday issued one-year certificate of deposits at 9.63%, indicating high cost of funds in the system.
The retail deposit rates of most banks for three- to five-year maturity basket is between 9% and 9.5%. “If RBI cuts rates, technically banks will have to pass the benefit to their customers. But they cannot readily do it because their cost of operation is huge and unless liquidity comes back in the system their will be pressure on their margins,” said Naresh Makhijani, executive director at the Indian arm of consulting firm KPMG.