More banks cut lending, deposit rates

Central Bank, Syndicate cut base rates; Bank of Baroda, Oriental Bank of Commerce reduce deposit rates

More public sector banks (PSBs), resisting a cutting of interest rates so far, have started falling in line.

Syndicate Bank and Central Bank of India said they’d cut their base rates (BRs), to which all loans are linked, from Monday. The latter reduced its BR by 30 basis points (bps) to 9.95 per cent; Syndicate Bank reduced its by 25 bps to 10 per cent.

The Union finance ministry has asked PSBs to explain their reluctance for a rate cut, which the bankers have to explain in a meeting scheduled with minister Arun Jaitley next Friday.

The rate reduction follows the Reserve Bank of India’s decision this Tuesday to cut the repo rate, at which it lends to banks, by 25 bps to 7.25 per cent.  RBI has reduced the repo by 75 bps since January.

Most PSBs have kept their BR at 9.95-10 per cent, barring State Bank of India, which has reduced its to 9.7 per cent, the lowest among all lenders. A few, like Andhra Bank and Dena Bank, are yet to take a call on rate revision. Both these banks’ BR is 10.25 per cent.

Some lenders have also started preparing ground for a further rate cut by reducing their deposit rate. Bank of Baroda and Oriental Bank of Commerce reduced theirs on various maturities with effect from the coming Monday. A decline in cost of funds will give banks more room for reducing their lending rate.

Banks have been reluctant to cut lending rates, evident from the fact that they have reduced their BR by only 25-30 bps in response to the repo rate cut of 75 bps. The central bank has said it expects full monetary transmission of its cut from the PSBs.

Banks are resisting a lending rate cut because their net interest margins will come under further pressure. Margins have been squeezed as more assets are turning bad and not earning any interest rate. Banks' woes have been compounded with slow credit offtake amid an economic slowdown.

Bankers say cutting the BR rate will not help generate demand for loans, as there are structural issues like coal linkages and environmental clearances, which need to be addressed first to revive big investments.

In such an environment, a bank will end up earning lower interest revenues on existing loans by cutting the BR, without getting additional demand for loans, is the argument.