Mumbai: There is abundant growth in deposits and enough liquidity with Indian banks to enable lower interest rates, a top industry official said on Monday.
About half the money generated from deposits was lent by banks to companies and individuals, while “quite a bit of money” has been invested, M.B.N. Rao, chairperson, Indian Banks’ Association (IBA), said.
“Out of Rs100 deposit generated this year, only Rs49-50 went into credit, the rest went into investments,” he said.
Incidentally, the Reserve Bank of India (RBI) governor Y. V. Reddy has kept monetary policy rates fixed but says banks are profitable enough to cut rates. In addition, finance minister P. Chidambaram had recently asked banks to cut interest rates to boost growth.
The growth in investments has been around 30%, Rao said. “If you are not able to get your effective cost of deposit at that rate (10-year paper), why do banks need to raise deposits at higher costs and keep in government securities?”
“My general impression is as far as liquidity is available, there is definitely scope for interest rates to come down,” Rao said. Although inflation is a concern, supply and demand of money should be a criteria for commercial banks while fixing interest rates, he said.
“There is abundance of liquidity, the incremental credit-deposit (CD) ratio has been around 50%,” Rao said.
Indian banks, including the top lender, State Bank of India (SBI), have been cutting lending rates for the last fortnight after the central bank held its key lending rate steady.
Mint reported on 18 February that SBI chief O.P. Bhatt is trying to build a consensus among bankers for an interest rate cut. Rao, who is also Canara Bank’s chairman and managing director, and others had attended a secret meeting to this effect in Mumbai on Saturday.
A staff writer contributed to this story.