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Your wait to borrow money at cheaper rates will continue as banks are unlikely to pare lending rates anytime soon.
High cost of funds coupled with pressure on net interest margins and additional provision requirements have left banks with very little room to reduce rates. The status-quo is also expected to continue as the Reserve Bank of India (RBI) kept its key policy rates and cash reserve ratio (CRR) unchanged in the mid-quarter monetary policy review today.
"The rupee has depreciated sharply, while current account deficit has widened. Hence, it was not a surprise to see RBI maintaining status-quo on policy rates. We have been proactive in monetary transmission and reduced our base rate in February. But I don't think the current environment is conducive for further rate cuts. Banks are unlikely to cut rates unless there is 50 basis points reduction in policy rates or CRR," Shubhalakshmi Panse, chairperson and managing director of Allahabad Bank, told Business Standard.
Most bankers echoed a similar view and said lending rate cuts were possible if deposit rates start declining. "As of now it looks like a status-quo (on lending rate cuts). We would be carefully watching the trajectory and our ability to contain the cost deposits. That would determine our future view point on lending rates," SS Mundra, chairman and managing director of Bank of Baroda, said.
The industry has been demanding a reduction in rates for some time and RBI's decision to keep policy rates unchanged has left them fuming. "The decision is disappointing," Chandrajit Banerjee, director general of Confederation of Indian Industry (CII), said.
The property developers' association – Confederation of Real Estate Developers' Association of India (CREDAI) – said the status-quo on rates is likely to lead to an "irreversible economic slowdown". The government has also urged banks to consider lowering of interest rates to encourage investments and accelerate economic growth.
"There is pressure on nationalised banks to cut rates. Banks are constrained to cut lending rates because deposit rates are still high and there is pressure on asset quality. But within that constraint we have been offering concessional rates to micro and small enterprises, and other priority sectors of the economy. We will continue to look for opportunity to cut rates but unless deposit rates fall there is very little that we can do," M Narendra, chairman and managing director of Indian Overseas Bank, said.
Most bankers also expect deposit rates to stay high unless RBI takes steps to improve liquidity in the system. "It is difficult to reduce deposit rates further as it will create disincentive for savings. There is already a pressure on banks' net interest margin. Hence, lending rate cuts are unlikely," Sanjay Arya, executive director of United Bank of India, said.
A few bankers, however, expressed optimism that lending rates may fall in the first week of July if inflationary pressure eases.
"We have started reducing our deposit rates. On June 10, 2013 we cut interest rates on deposits maturing in one year by 25 basis points. We will review our margin and cost of funds at the end of this month. If possible we will reduce our lending rates in the first week of July. It is not a commitment and I'm not sure if it will be possible. It will depend on our margin and cost of funds," SL Bansal, chairman and managing director of Oriental Bank of Commerce, said.
"As inflation trends down and increases possibility of rate cuts, we are likely to see both depositor and borrower beginning to see positives. We remain cautiously optimistic of what the future beholds for us," Shyam Srinivasan, managing director and chief executive of Federal Bank, said.
