Banks likely to cut lending, deposit rates by 20 bps in four months

Following the Reserve Bank of India’s (RBI’s) 25-basis point repo rate cut, State Bank of India’s cash credit and overdraft rates will become cheaper by 25 bps from next month. The revised rate will be 8 per cent.

SBI’s interest rate on savings deposits above Rs 1 lakh will stand reduced to 3 per cent from July. The country’s largest lender has linked its cash credit and overdraft rates and small savings deposits above Rs 1 lakh to the repo rate for better transmission of the policy rate.  

Many banks, including SBI and Bank of Maharashtra, will be holding meetings of their asset liability committees (ALCOs) over the next few days to decide the MCLR (marginal cost of funds-based lending rate) and term deposit rates.

P K Gupta, managing director, SBI, said the bank’s ALCO might meet this week.

Bank of Maharashtra Executive Director AC Rout said, “The ALCO is meeting tomorrow (Friday). Keeping the spirit of the RBI’s direction, the bank will take an appropriate call.”

Banks have signalled they may reduce interest rates by up to 20 bps over the next four months, making consumer credit — home, durables, etc —cheaper. 

At the same time, bankers pointed out higher interest rates on small savings had become a hurdle to reducing deposit rates further.
 

Senior public sector bank executive said better liquidity conditions would be conducive for passing on benefits to borrowers. For better transmission, the government also has to revise (read: reduce) interest rates on small savings deposits. They are linked to yields on government bonds, which have declined substantially in response to the RBI’s rate cuts. 

Sameer Narang, chief economist, Bank of Baroda, said they expected the RBI to reduce the policy rate by another 25 bps in August or October. Further reduction in interest rates will lead to lower real rates and thus kick-start private sector investment cycle. R K Gurumurthy, head of treasury at Lakshmi Vilas Bank, said more measures could be seen in the coming days which would help achieve faster and sizeable rate transmission. 

The RBI has decided to revise the existing liquidity management framework. It will constitute an internal working group to review the framework and suggest measures to simplify it. The group is expected to submit its report by mid-July 2019.  

Karthik Srinivasan, group head, financial sector ratings, Icra, said, “There is a need for greater clarity on the usage of various tools or liquidity levels at which various triggers for liquidity infusions get activated to improve the transparency of the liquidity framework.”