The Reserve Bank of India’s (RBI) decision to reduce the Statutory Liquidity Ratio (SLR) is likely to bring down bulk deposit rates and encourage banks to cut interest rates on retail loans and working capital finances, said bankers.
In an unexpected move on Tuesday, RBI reduced the minimum requirement for banks’ government bond holdings or SLR by 100 basis points to 23 per cent, with effect from the fortnight beginning August 11.
The move is aimed to ensure credit flows continue to productive sectors and do not suffer from tight liquidity conditions.
At a time when system liquidity is showing signs of improvement, bankers expect the SLR cut to ease the pressure on bulk deposit rates. In turn, this will allow banks to reduce their lending rates in the coming months, bankers said.
“I think these (funds that will be available due to SLR cut) will largely go to the retail sector...For banks like us, there is now an option to accelerate in the retail space. So, to attract customers, there will be a reduction in rates,” said Pratip Chaudhuri, chairman of State Bank of India. (Click for the graphs)
While not many bankers were willing to commit on a lending rate cut, they agreed that further improvement in the liquidity situation will ease upward pressure on deposit rates and provide scope to bring down lending rates.
“Credit is not growing. If the deposits are surplus with you, you will like to reduce the rate on these. That may eventually translate into reduction of lending rates,” said Alok Misra, chairman and managing director of Bank of India.
The tightness in systemic liquidity started easing in the first quarter of 2012-13. The average daily borrowing by banks under the LAF (Liquidity Adjustment Facility) window came down to around Rs 97,000 crore in April-June from Rs 140,000 crore in the previous quarter.
Interest rates on market instruments like commercial paper (CP) and certificates of deposit had normalised during the first three months of this financial year. The three-month CP rates moderated to 9.5 per cent during this period from over 11 per cent a quarter earlier. In July, the liquidity pressures eased further, with average LAF borrowings falling to less than Rs 50,000 crore a day.
“In the near term, this (SLR) reduction will make about Rs 65,000 crore of additional liquidity available to the banking system. This will help to make credit available to retail and corporate borrowers and also keep interest rates under control,” said Chanda Kochhar, managing director and chief executive officer of ICICI Bank.
Bankers said they’d prefer to wait for more cues from the central bank before reducing their base rates. However, they do expect short-term lending rates to ease in the near term.
“Lending rates will still be driven by RBI’s actions on the repo rate. The SLR cut will probably reduce the size and frequency of OMOs (open market operations) in the second half of this financial year. It will also lead to a gradual reduction in cost of funds. This will allow banks to offer working capital loans at lower rates,” said Rana Kapoor, managing director and chief executive officer of YES Bank.