Your wait for a reduction in lending rates may soon be over, if the country’s largest commercial bank has its way.
State Bank of India (SBI) is weighing options to pare interest rates on certain sector-specific loans, despite the Reserve Bank of India (RBI) keeping the repo rate unchanged at its mid-quarter policy review. The bank’s asset-liability committee (ALCO) is scheduled to meet tomorrow to review lending rates.
“I see some room for cutting lending rates following the cut in the cash reserve ratio (CRR) last week. It is not right for me to pre-decide on behalf of the ALCO. But when we had a 50 basis point CRR cut last time, we passed it to our customers with significant cut in rates of our educational loans. Similarly, we will definitely cut rates (again), but the segments and extent will need a more granular analysis. That will be done by our ALCO,” Pratip Chaudhuri, SBI chairman, said.
The lender, however, is not likely to reduce its base rate, or the benchmark lending rate to which all loan rates are linked. It’ll rather tweak card rates and sacrifice on margins. According to a senior SBI official, the bank would have already cut the rates, but the recent spike in short-term rates deferred the plan. Short-term rates like the three-month certificate of deposit rate are close to three-year high of 12 per cent due to tight liquidity conditions.
Banks' base rate (in %)
|State Bank of India||10.0|
|Bank of Baroda||10.75|
The state-run lender had cut interest rates on educational loans by 25-100 basis points at the end of February, a month after the central bank reduced CRR by 50 basis points. Earlier this month, the RBI slashed CRR by another 75 basis points to infuse liquidity in the system.
Though SBI hints at softer lending rates, other banks are still in a wait-and-watch mode. “I don’t foresee lending rates coming down immediately. For that to happen, the resource cost has to come down. Given the current tightness in liquidity conditions, I don’t think there’ll be any cut in rates as of now,” M D Mallya, chairman and managing director of Bank of Baroda, said.
Similar views were echoed by chief executives of several other public and private sector banks. They felt it was too early to reduce interest rates and prefer to keep a status quo on rates till the next monetary policy review on April 17.
“I don’t think it’s possible for us to cut rates immediately. While the CRR cut has definitely provided some relief on the liquidity front, we’ll still wait for some more time before reducing our rates,” said T M Bhasin, chairman and managing director of Indian Bank.
Since the RBI pressed the pause button on the rate hike spree in December, only three banks — Union Bank of India, Bank of Maharashtra and Federal Bank — have reduced their base rates or minimum lending rates. The rate cuts, however, were limited to only 10 basis points.
While most bankers said they were not likely to reduce rates in the near term, industry analysts said if SBI decided to cut its lending rates aggressively, other banks would have no option but to follow suit.
Even Chaudhuri appeared to corroborate this. “If some efficient banks start lowering their base rates, other banks will either have to fall in line or forego the good business,” he said.
However, like most other banks, SBI does not plan to slash its deposit rates anytime soon, as it may lead to flight of funds from the bank to other government savings schemes offering attractive interest rates.
“In India, for almost all banks, 80 per cent of their funding comes from deposits. So, I do not see much room for a deposit rate cut because the government’s savings schemes are offering 8.4 per cent rate and tax-free bonds are available at eight per cent. So, if the bank’s deposit rates go below that, we will lose deposits,” Chaudhuri said.