Govt banks say room for rate cut

Private players say their cost of funds has to come down first.

In view of Finance Minister Pranab Mukherjee’s remark that he will ask banks for a “benign plan of action” to stimulate economic growth, public sector banks have indicated that there is room for further cuts in lending rates. Private sector banks, however, say they will first focus on reducing their cost of funds.

Bapi Munshi, president, treasury at India’s third-largest private sector lender, Axis Bank, said, “We cut our prime lending rate (PLR) by 50 basis points (bps) recently after a 50 bps cut in April. We have not cut our deposit rates recently, unlike some other banks. We need to first take a call on deposit rates.”

“But we will definitely evaluate our lending rates to make sure that they are competitive,” he said. The bank’s PLR is 14.25 per cent.

PR Kalyanaraman, executive director of Kerala-based private sector lender, Federal Bank, said the bank had already brought down its PLR to 14.25 per cent from 15.5 per cent. “While taking a decision on any further reduction, the bank has to keep in mind its cost of funds. Public sector banks have an advantage of getting government business, which provides low-cost deposits. For a private bank like us, increasing the share of low-cost deposits will be a gradual process,” he added.

Another Kerala-based private sector lender, Dhanlakshmi Bank, has cut its mortgage rates by 200 bps. The bank will now offer loans at 9 per cent for up to five years, 10 per cent for 5-10 years and 10.50 per cent for tenures of more than 10 years. The rates are fixed for the first three years with an annual reset clause thereafter. Chief Financial Officer Bipin Kabra said the cost of funds for the bank would come down as it cut deposit rates by 100 bps recently. Lending rates are expected to decline by more than 100 bps over the next two-three months.

Public sector banks, he said, had the benefit of a large number of low-cost deposits (current and savings accounts) compared with private banks.

ICICI Bank, India’s largest private sector lender, declined comment. Officials from the country’s second-largest private sector lender, HDFC Bank, could not be reached for comment.

Bank of India Chief Finance Officer VK Agarwal said there was room for lending rates to come down by 50-100 basis points. “The cuts are likely to happen in June. First, there could be a revision in the benchmark prime lending rate (BPLR). This could be followed by a cut in rates of BPLR-linked products,” he said.

“With up to 200 bps cut in term deposit rates, it will be tough to make any further cut. Any further cut will adversely affect savers, especially pensioners,” Agarwal said.

Bank of Baroda Executive Director RK Bakshi said there could be a revision (cut) in lending rates in a fortnight. The quantum of reduction would be based on a review by the bank’s asset liability committee, he said.

Though banks had reduced their deposit rates, benefits of reduced cost of funds would accrue only over a period, he added.