Lending rate rise not likely, say bankers

Banks seem to be in a lenient mood this festive season towards customers, despite the 25-basis point rise in the repo rate by the Reserve Bank of India. The bankers did not indicate whether there would be an upward revision in the base rates.

Banks’ reluctance to make loans dearer has been triggered by the excess liquidity in the system, and an indication by the regulator that the pause button has most likely been pressed.

“The base rate may not be increased. Our compulsion to hike lending rates will happen if our deposit rates go up. As of on Tuesday, all the banks are seeing good inflow of retail deposits. The liquidity is plentiful and the banks continue to enjoy an advantage over the government savings schemes,” said Pratip Chaudhuri, chairman, State Bank of India. The credit demand is also not that strong, and the preliminary results of the banks show the margins are quite high, Chaudhuri added.

The liquidity situation for the banks has been comfortable, and the credit offtake has been slow. The chairman of the largest public sector lender also said there was no need for banks to compete for deposits by increasing rates. “ There is excess liquidity with the banks at the moment, and we are thinking whether the liquidity could be cut,” Chaudhuri told the media.

RBI has increased the repo rate by 350 basis points since March 2010 to combat inflationary pressures and has maintained an unflinching anti-inflationary stance. The central bank now expects the effect of its past actions to play out and inflation to come down to seven per cent by March.

“Repo rates have moved up. There is an indication that further rate rises may not happen and there is a distinct possibility of inflation coming down to seven per cent. So, the pressure on interest rates might as well come down,” said M V Nair, chairman and managing director, Union Bank of India. It would be a very careful decision that banks would have to make, considering the margins of the corporates have been under pressure, Nair added.

The incremental credit-deposit ratio, which reflects the amount banks are lending for every rupee deposit, has fallen to 55 per cent in the first six months of the current financial year from 76 per cent recorded during the same period of the previous year.

Despite the majority of the bankers hinting at the absorption of impact of the rise 25 basis points by them, YES Bank on Tuesday raised its base rate and benchmark prime lending rate by 25 basis points to 10.5 per cent and 19.75 per cent, respectively.