Banks reluctant to reduce lending rates3 min read . Updated: 07 Dec 2008, 09:56 PM IST
Banks reluctant to reduce lending rates
Banks reluctant to reduce lending rates
Mumbai: Public secor banks, which account for about 70% of the country’s banking assets, are reluctant to reduce borrowing costs immediately on the heels of the Reserve Bank of India (RBI) slashing its key interest rates by 1 percentage point each to stimulate flagging economic growth.
Bankers argue that unless their cost of funds declines, a reduction in loan rates would hurt their business. Banks will probably cut deposit rates— which range between 9.5% and 11%—before lowering loan rates, they say.
“Unless the cost of resources comes down, it is tough for us to reduce our lending rates," said R.S. Reddy, chairman of Andhra Bank. The lender’s asset-liability committee will meet soon to evaluate the cost of funds and yields on advances before deciding on a lending rate cut, he said.
On Saturday, RBI reduced its repo rate and the reserve repo rate by 1 percentage point each in the latest attempt to lower the cost of credit for companies and consumers and boost economic growth that’s slowing from an average annual pace of 8.9% in the past four years. Bank of Baroda chief M.D. Mallya also said rates on deposits need to come down before banks lower their prime lending rate, or PLR, the rate they charge their best customers. “It (RBI rate cuts) is a strong signal for banks to reduce rates. But first the deposit rates should come down before we reduce our lending rates," said Mallya. “Bank of Baroda’s asset-liability committee will meet soon to take a decision on rate cuts."
Following a meeting with the finance minister last month, banks reduced their PLR by 75 basis points. One basis point is one-hundredth of a percentage point. This followed a cut in deposit rates by 50-100 basis points at some banks.
Punjab National Bank, or PNB, India’s second largest state-owned bank, for example, slashed both its deposit and lending rates by 100 basis points after the meeting even after it had cut its PLR by 50 basis points just days before. While PNB may not cut its interest rates further this time, other public sector lenders are likely to match its reduction, slashing their PLR to 12.5% from 14% before November.
Most public sector banks, including State Bank of India, or SBI, the largest, have reduced their deposit rates from 1 December. Those who did not slash their deposit rates will start doing so now. “We are reducing our deposit rates by 1% next week," said Yogesh Agarwal, chairman and managing director of IDBI Bank Ltd. “There could be some sectoral adjustments in lending rates but we have to take a view on whether a PLR cut is warranted or not at this point of time. Decrease in deposit rates takes some time to bring down the cost of funds, which is still high," Agarwal said.
According to a senior SBI official, his bank will take stock of the entire government stimulus package and then decide on rates.
“It’s a signal of interest rates softening. But it is left to banks to take individual decisions," said the SBI official, who did not wish to be named. “Rate cut decisions cannot be taken on a daily basis. We have to check the other aspects of the stimulus package, its implication for various industries, before coming to a decision."
Private sector banks, which have not reduced their PLR so far, have started responding to RBI signals with Yes Bank Ltd reducing its main lending rate by 50 basis points, effective 8 December. Justifying the rate cut, Rajat Monga, president, financial markets and chief financial officer, Yes Bank, said, “Supporting the measures taken by the regulator against the backdrop of an easing inflation scenario and to spur growth momentum in the economy, we believe this is an appropriate time" to lower loan rates. ICICI Bank Ltd, the country’s largest private sector lender and second largest overall, has reduced its interest rate on floating home loan rate by 1.5 percentage points to 11.5% for loans up to Rs20 lakh for new customers. However, it was non-committal on a PLR cut.
Chanda Kochhar, joint managing director, ICICI Bank, said “RBI has given a strong signal that liquidity will remain adequate in the system. The interest rates are also expected to soften with these current measures. ICICI Bank continues to monitor the interest rate on a daily basis and will take necessary measures accordingly’’.