HDFC Bank slashes base rate to 9.35%

ICICI Bank and State Bank of India have a base rate of 9.7%

In a move that caught its competitors off guard, HDFC Bank, India’s second-largest private lender, has reduced its base rate, the benchmark to which all other lending rates are linked, by a steep 35 basis points to 9.35 per cent. The new rate, effective Tuesday, is much lower than those of its competitors.

ICICI Bank and State Bank of India (SBI) have a base rate of 9.7 per cent.

A senior SBI official said the bank’s asset liability committee would soon meet to decide on whether the interest rate should be revised. “We will look for the monetary policy action in September-end and will also watch the consumer price inflation numbers before taking a call,” the official added.

With the cut, HDFC Bank has reduced its base rate by 65 basis points since April. It had cut this rate by 15 basis points twice, in April and June.

Ashish Parthasarthy, head (treasury), HDFC Bank, said the revision was followed by a significant reduction in deposit rates. “Base rate, as a formula, is linked to the cost of funds, which has been trending downwards. With this, we have also reduced the deposit rates; in the past two months, these have come down by 25-50 basis points. So, today (Monday), we had an asset liability committee meeting, at which we decided to reduce the rate.”

He believes this sharp revision won’t have an impact on the net interest margin (NIM); it will continue to remain in the range of 4.2-4.6 per cent.

“There should be some impact on the margins in the near term. As a thumb rule, every 10-basis-point cut in base rate has a two-three basis-point impact on margins. But, they would have also benefited from the cut in deposit rates. So, overall, I would say in the near term, they could see an impact of five-eight basis points on their NIMs,” said Vaibhav Agrawal, an analyst at Angel Broking.

HDFC Bank’s margins are one of the highest in the sector. Analysts said even if its margins fell, these would remain more than four per cent.

For the June quarter, the bank’s NIM stood at 4.3 per cent, 10 basis points lower than in the quarter ended March. ICICI Bank’s NIM declined to 3.54 per cent in the June quarter from 3.57 per cent in the previous quarter. SBI saw a sequential drop of 17 basis points in its margin in the June quarter.

It will be difficult for other banks to match HDFC Bank’s base rate. This is particularly true of public sector banks, as their margins are already under pressure, owing to an increase in non-performing loans.

Despite the economic slowdown which has impacted asset quality, HDFC Bank, which focuses on retail lending, unlike public sector banks, has been able to maintain healthy asset quality.

Canara Bank announced a base rate cut of 10 basis points to 9.9 per cent, effective Thursday. Axis Bank cut its deposit rates by up to 0.5 per cent across maturities, effective Tuesday.

Another mid-sized private sector bank said it would decide on its base rate only after the central bank's policy review in September. "This substantial cut by HDFC Bank is also a reflection that credit offtake is not happening and they want to gain market share. So, if there is no credit offtake, there is no point in reducing the rate in a hurry." The Reserve Bank of India has been stressing the importance of complete transmission of cuts in the policy rate. From the beginning of this year, it has reduced its repo rate (at which it lends to banks) by 75 basis points, while most banks have reduced their base rates by 25-50 basis points.

"The willingness of banks to cut base rates, whereby they forego income on existing borrowers to attract more new business, is muted," the central bank said in its annual report.