BackViews | Banks may not rush to cut loan rates
Views | Banks may not rush to cut loan rates
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The country’s largest lender, State Bank of India (SBI), has cut its deposit rates by one full percentage point. Many believe others bank may follow suit, and we may even see banks cutting their minimum lending rate, or the base rate, finally, as the cost of money for them will come down. Till now, SBI and a few others have selectively cut loan rates in certain segments such as mortgages, auto loans and education loans but none has cut the base rate, which will drive down the cost of loans for borrowers across segments.
The government has borrowed ₹ 3.09 trillion or 54.2% of the annual gross amount so far. Its net borrowing has been ₹ 2.34 trillion, or 48.9%. On 22 September, there will be redemption of bonds worth ₹ 1,000 crore and another ₹ ,000 crore will come up for redemption in November. But the money released through redemptions will be soaked up by new bonds. Besides, around ₹ 0,000 crore will leave the system when Indian corporations pay their advance income tax in mid-September. This means the comfort on the liquidity front will not last long and not too many banks may feel encouraged to cut deposits rates and eventually loan rates.
At the same time, the system may not see the kind of liquidity tightness that it had witnessed last year. The government will start spending in the second half of the year and that will neutralise the impact of advance tax outflow.
One reason behind SBI’s decision to cut the deposit rates could be the lack of credit offtake. All banks have been shedding their high-cost bulk deposits in the absence of credit offtake. Till 10 August, year-on-year, credit offtake has been 16.5% against 20.3% in the previous year. Deposit accretion too has been less than the previous year but in the absence of credit offtake banks are deploying money in government bonds.
If indeed the credit offtake picks up in the second half of the year, there may not be any scope to cut deposit rates further and the base rate cut may still remain a mirage. Unless, of course, the banks bite the bullet, nudged by the finance ministry’s moral suasion.
One thing is for sure though – with the Reserve Bank of India actively managing liquidity, banks will not be starved of money this year. Until now, the central bank has infused ₹ 81,580 crore through its bond buying programme or so-called open market operations (OMOs). It will continue to conduct OMOs to keep the cash deficit in the system within 1% of bank deposits, around ₹ 63,000 crore, which has been its stated objective.
In sum, SBI’s deposit rate cut could be an isolated event and it’s too early to expect a base rate cut by banks even though we may not see a severe liquidity crunch.
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