Days after the Reserve Bank of India (RBI) cut the repo rate in a surprise move, banks have set the ball rolling for a possible lending rate reduction.
A host of lenders including State Bank of India (SBI), IDBI Bank, Indian Bank, Andhra Bank have lined up meetings of their Asset Liability Committee (ALCO) this week to review their lending and deposit rates.
“We will review it next week though the exact date for the ALCO meeting is yet to be fixed,” said B Sriram, Managing Director-National Banking Group, SBI, the country’s largest lender.
Many banks have already reduced their deposit rates of select maturities during the October-December period following comfortable liquidity condition amid a sluggish credit growth. As a result, the cost of funds has fallen, albeit marginally. In the third quarter, SBI reduced deposit rate by up to 50 bps.
Along with lending rates, banks are also like to reduce deposit rates, in order to protect margins.
“We have an ALCO meet this week. Apart from lending rates, deposit rates also need to come down. So far there has been minor correction in some maturities but now we will take a closer look at the rates,” said M S Raghavan, Chairman & Managing Director, IDBI Bank.
With tepid credit growth, banks have been flush with excess liquidity and as a result deposit rates had started coming down. In the month of December, SBI had excess liquidity of Rs 70,000 crore and as a result has been trimming its deposits.
Another senior SBI executive said the bank continues to carry a huge surplus till now (mid-January) and the statutory liquidity ratio (SLR) is about five per above the floor rate of 22.5 per cent. “We have reduced deposits rates since the second quarter and were expecting other banks also to reduce it but they continue to remain high.”
Credit demand has been decelerating and loans grew at its slowest pace in a decade in September, 2014. According to RBI’s latest data, the year-on-year growth in bank credit was 10.5 per cent as on December 26, 2014.
A section of private and public sector lenders believe that if SBI cuts rates, other lenders will follow suit. SBI’s base rate – the benchmark rate to which all loan rates are linked with – is at 10 per cent.
A few of the bankers, however, denied that they would come under peer pressure and said a decision to cut base rate is a function of its cost of funds.
“We will review rates in the coming week. Though incremental cost of funds has come down in the third quarter, there will be time lag between RBI decision (repo rate cut) and bank decision. But no peer pressure would be at work,” said a senior executive of Chennai based public sector lender Indian Bank. The base rate of bank is 10.25 per cent.
Two other public sector banks – Mumbai-based Union Bank of India and Kolkata-based United Bank of India – have already cut base rates by 25 basis points to 10 per cent, following RBI’s repo rate cut last Thursday. Union Bank has also reduced interest rates on retail and bulk deposits across certain maturities by 10-50 basis points.