Saving deposit rate cuts sets stage for lower lending rates: Report

Rates reduction by 3 banks include SBI, Bank of Baroda and Axis Bank stoke competition among lenders

Reduction in saving deposit rates by three large banks over the past fortnight may set the ball rolling for lower lending rates and stoke greater competition among lenders, says a report.

The nation's largest lender, State Bank had on July 31 slashed the pricing for under Rs 1 crore saving deposits by 0.50 per cent to 3.5 per cent.

Bank of Baroda and Axis Bank followed, which last week revised downwards their savings rates by a similar quantum for deposits of up to Rs 50 lakh.

According to India Ratings, since the profitability banks remain weak owing to continued pressure on asset quality and low credit demand, it will be imperative for these cash-rich lenders to start gaining market share over weaker peers that are starved of capital.

"With the interest rate cycle reaching the bottom, downward repricing of existing liabilities can facilitate a further reduction in the rates. A few large banks cutting savings deposit rates over the past few weeks is a move in that direction," the agency said in a report.

The report also said slashing saving deposit rates for an amount below Rs 50 lakh presents large public banks that have stable, large and granular savings deposit base with additional manoeuvrability over private peers to cut marginal cost of lending rate.

Public sector banks have more room than private banks to percolate savings banks rate cut into reduction in MCLR because of a large base and sticky saving accounts.

The maximum cut in MCLR (marginal cost based lending rate) -- which is up for review by the RBI due to poor transmission -- for state-owned banks can be 0.35 per cent, assuming a 0.50 per cent cut in savings deposit rates.

"A cut in the MCLR beyond 0.35 per cent would become a margin dilutive proposition," the report warned. For private lenders, the threshold is 0.25 per cent.

According to the report, this could intensify competition between large lenders with strong savings deposit franchise and capitalisation towards gaining credit market share while channelising some volumes in the commercial papers market towards bank credit.

If bank rates were to decline from 2016-17 levels, it could provide some relief to vulnerable corporates to service their debt provided the benefit is transmitted to these borrowers, it said.

However, credit profiles of these entities are unlikely to improve much owing to their weak operating metrics and cash flows coupled with high debt levels, the report added.

"An improvement in demand growth rather than lower interest rates will have a greater positive impact on the credit profiles of overleveraged entities," the report concluded.