Steep deposit rate reduction difficult, bankers tell RBI

Bankers On Thursday told the Reserve Bank of India (RBI) that they may not be able to reduce deposit rates substantially as they fear depositors shifting from banks to small savings instruments such as postal deposits and public provident fund (PPF).

During a pre-credit policy review meeting On Thursday, bank chiefs told the RBI team led by deputy governor Rakesh Mohan that they needed to mobilise deposits as they were facing additional demand for funds with other sources drying up.

With reductions in repo, reverse repo and the Cash Reserve Ratio (CRR), banks have reduced deposit rates by up to 300 basis points (bps).

On high-cost bulk deposits, public sector banks, which have pared lending rates by up to 150 bps, are now quoting a rate of 7.5 per cent for one-year. “When government schemes are offering 8 per cent rate, banks cannot go below that. If we cut rates further, we will not be able to attract fresh funds and will also face the prospects of depositors existing in favour of small savings instruments,” said a banker who attended the meeting.

Apart from Indian Banks’ Association (IBA) CEO K Ramakrishnan, ICICI Bank Managing Director and CEO K V Kamath and HSBC India Chief Naina Lal Kidwai were among the top bankers who attended the meeting.
 

BALANCING ACT

* Banks fear losing deposits to small saving schemes

* One-year bulk deposit rates cut to 7.5 per cent, while small savings offer 8 per cent returns

* Banks have cut deposit rates by up to 300 basis points

*Demand for bank loans high as other sources of funding have dried up

*Till early January, credit growth at 24 per cent against RBI’s target of 20 per cent for the year

According to sources, banks did not have a big wish list. As the monetary authority and banking sector regulator, RBI has been proactive infusing resources into systems, reducing cost of funds and giving flexibility in restructuring accounts of viable units which face temporary cash flow problems, said a bank executive.

Bankers informed RBI that resources were flowing in and liquidity in the system was adequate. The business, especially on credit side, has shown a year-on-year growth of 24 per cent till early January 2009. The problems of the medium and small enterprises (SMEs) as also the sectoral review were on the agenda. While textiles and small units are facing stress due to a sharp drop in external demand, steel and cement units are beginning to show some signs of recovery, a banker said.

The discussion also dealt with likely inflation trend till March 2009. The fall in commodity prices has eased the pressure on inflation. Inflation, measured by the wholesale price index (WPI), fell to a 48-week low of 5.24 per cent for the week ended January 3, 2009 against 5.91 per cent a week ago.