Deposit rates start falling; lending rates to follow suit

PNB & OBC cut deposit rate; SBI still cautious

 

Punjab National Bank, the third largest lender in the country, has slashed fixed deposit rates up to 200 basis points (bps) on various maturities. Another public sector lender, Oriental Bank of Commerce, said it would offer 25-50 bps less on new deposits of shorter tenures, from tomorrow. More banks are likely to follow.

The deposit rate cut, which will reduce banks’ cost of funds, will enable the lenders to bring down their base rates, too. This is the benchmark reference rate to which all interest rates are linked. HDFC Bank, the second largest private sector lender, had earlier said it would reduce its base rate by 10 bps to 9.6 per cent, with effect from on Monday.

“We want to reduce the cost, so we have cut the deposit rate. This will help us in bringing down the lending rates,” S L Bansal, chairman and managing director of Oriental Bank of Commerce (OBC), said. He added the bank would review the situation on rates in the next 15-20 days. At present, OBC’s base rate is 10.25 per cent.

State Bank of India (SBI) — the country’s largest lender — said it would be careful before revising the deposit rate. “We had reduced the deposit rate to 8.5 per cent and have seen deposit flowing out from us. We will be very cautious in revising the deposit rate downward. We can afford to pay the present deposit rates, keeping the base rate at 9.7 per cent, one of the lowest in the industry,” said Pratip Chaudhuri, chairman.

However, some other large banks feel there is scope to reduce the deposit rate.

“By mid-April, I think deposit rates will be realigned substantially. In addition, depending on the liquidity situation and the cost of funds, lending rates will also be reviewed. We will also review our rates during that time,” said S S Mundra, chairman and managing director of Bank of Baroda.

For deposits of less than Rs 1 crore with a maturity period of 180 days to less than a year, PNB has cut the interest rate from 8.75 per cent to 7.50 per cent.

For deposits of Rs 1 crore to Rs 10 crore, with 30-45 days’ maturity, rates have been reduced 200 bps, to 6.5 per cent. For six months to less than one year maturity, rates have been reduced by 50 bps to 8.25 per cent.

Following tight liquidity conditions in the last quarter of the financial year, banks raised deposit rates to support their credit off take. Banks have borrowed more than Rs 1 lakh crore daily from the repo window of RBI in March.

The liquidity tightness of March had made the banks to avail of the marginal standing facility of RBI. Funds availed via MSF attract interest rate of 8.5 per cent, 100 bps more than the prevailing repo rate.

Liquidity tightness is expected to come down, as loan demand remains weak during the first half of the financial year.

“This is the beginning of the financial year, so there is not so much appetite for loan demand. Deposit rates are already high and banks have not reduced it after the repo rate cut in the March policy of RBI. So, there is a case to review the deposit rate,” said M Narendra, chairman and managing director of Indian Overseas Bank, adding for lending rates to come down, deposit rates need to be reduced first.

During its mid-quarter policy review on March 19, RBI had reduced the repo rate by 25 bps to 7.5 per cent. The central bank will meet on May 3 for the annual policy review.