India's banks seen unlikely to match RBI's rate cut any time soon

By Suvashree Choudhury

MUMBAI (Reuters) - Indian bankers say piles of bad debt and the high cost of deposits mean they are unlikely to reduce interest rates on loans by as much as the central bank cut its key lending rate in a bid to spur growth.

The reluctance of bankers to pass on all of Thursday's surprising 25 basis point rate cut is a potential blow to Prime Minister Narendra Modi's government, which hopes lower lending rates will lift growth and job creation ahead of general elections due by May.

Making more credit available more cheaply is vital for Modi, who wants to please businesses, farmers and individual borrowers.

Four senior public and private sector bankers told Reuters on Friday that they might only cut lending rates by 5-10 basis points. A move of that size would have a negligible impact in boosting credit, or in reducing refinancing costs.

"If there is a lot of (government) pressure, then I may cut by a notional 5-10 basis points," said the head of a big state-run bank who asked for anonymity due to sensitivity of the subject.

"That may have a psychological impact on corporates but will not really help in boosting credit growth or lowering borrowing costs."

For Modi and new Reserve Bank of India Governor Shaktikanta Das, who is keen to boost private investments by lowering rates, this poses a problem.

Economic growth has slowed, with private investments slumping and consumption gains muted. Annual industrial output growth in November rose 4.1 percent, down from October's 8.4 percent.

For the banks - often stuck with bad loans and heavy provisioning - any cut in loan rates is unlikely without a corresponding fall in deposit rates, which will require cash conditions to improve significantly, say bankers.

And banks are reluctant to cut deposit rates in the fiscal year's last quarter, as they are keen to shore up their books while not losing hefty deposits.

Indian banks price their benchmark loan rates, known as the marginal cost of funds based lending rate (MCLR), mainly based on the cost of deposits.

"MCLR might not come down significantly very soon as any meaningful change will depend on cost of funds," said Parthasarathi Mukherjee, managing director and chief executive officer of private lender Lakshmi Vilas Bank.

Unless banking system liquidity rises, he said, "we are not seeing any substantial fall in lending rates across the board any time soon."

(Reporting by Suvashree Dey Choudhury; Graphics by Gaurav Dogra in Bengaluru; Editing by Euan Rocha and Richard Borsuk)