New Delhi: Bank lending rates are expected to soften by August on account of some relatively expensive deposits maturing, thereby opening up the possibility of lowering the cost of banks’ deposits, bankers and government officials said after a meeting on Wednesday between finance minister Pranab Mukherjee and the chairmen of public sector banks.
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In his first meeting with public sector bankers, Mukherjee brought up the subject of the cost of credit and asked them to look at ways to lower it. “Possibilities will be explored,” he told the media, when asked if public sector banks were open to reducing lending rates.
“Only after August do I see overall banks’ costs coming down, which will open the door to cut lending rates,” said J. Ganeshram, banking analyst at Spark Capital Advisors (India) Pvt. Ltd.
Deposits take longer to re-price as they are fixed costs, while lending rates react immediately to the prevailing environment.
According to Ganeshram, currently banks’ lending rates are less than a “good 35-40% of fixed deposits”.
Even while the meeting was on, Mukherjee’s office released a copy of his opening remarks, which expressed the government’s concern about the cost of credit.
“It is said that the reduction in key rates by RBI (Reserve Bank of India) is not getting adequately reflected in the reduction of BPLR (benchmark prime lending rate) of banks. I would urge the banks to address these concerns expeditiously and in adequate measure,” the minister said in his opening remarks.
BPLR rates have come down to the range of 12-12.25%, against 13.75-14.25% six months back.
Finance ministry officials said Mukherjee’s remarks were not to be interpreted as a directive to public sector banks. When asked if the government would give directives to banks to cut rates, finance secretary Ashok Chawla, who attended the meeting, said, “No.”
Bankers, who spoke to Mint, said BPLR was an inappropriate measure of the true cost of credit to the industry as around 80% of lending happens at rates below it.
A chairman of a public sector bank, who did not want to be identified, said some banks would lower their BPLR by at least 50 basis points by August.
State Bank of India’s board will meet this month to consider changing interest rates, chairman O.P. Bhatt said.
Both bankers and finance ministry officials, who attended the meeting, said some banks would be in a position to lower lending rates by August as a part of the term deposits they raised earlier at relatively high costs would mature.
Over the last few months deposit rates have begun to soften. According to data on RBI’s website, the deposit rates of major banks (maturity period exceeding one year) were in the range of 6.5% to 8% on 15 May, compared with a range of 7.50% to 9% a year ago.
The government’s small savings schemes, such as public provident fund, are seen as competitors to bank term deposits. Bankers have often pointed to the 8% interest offered by small savings schemes (effective returns on these are higher on account of tax benefits) as a systemic check on the softening of deposit rates beyond a point.
During the meeting, bankers pointed out the role played by small savings in keeping average cost of deposits higher than it could be, a banker said.
Mukherjee also spoke to the bankers about consolidation among public sector banks. “The process of consolidation of banks may be necessary to improve the state of Indian banks globally and also to reduce the risk to financial stability,” he said in his opening remarks.
Mukherjee, however, stuck to the long-standing government position that a move towards consolidation should come from the management of banks themselves. “I have suggested initiatives must come from bank management,” he told the media.
Reuters and Bloomberg contributed to this story.