Banks may not rush to cut loan rates


The country’s largest lender, State Bank of India (SBI), has cut its deposit rates by one full percentage point. Many believe others bank may follow suit, and we may even see banks cutting their minimum lending rate, or the base rate, finally, as the cost of money for them will come down. Till now, SBI and a few others have selectively cut loan rates in certain segments such as mortgages, auto loans and education loans but none has cut the base rate, which will drive down the cost of loans for borrowers across segments.
In some sense, it took six months for the Reserve Bank of India’s (RBI) policy rate cut to be transmitted into the system. In April, the Indian central bank cut its policy rate by half a percentage point. The apparent reason for cutting the deposit rate is easing liquidity in the system. The average bank borrowing every day from the RBI’s repo window is testimony to that. In April, the average borrowing per day was Rs.1.01 trillion. That came down to Rs.99,000 crore in May and Rs.92,000 crore in June. Since then, there has been a dramatic drop to Rs.46,000 crore in July and Rs.45,000 crore in August. In the first few days of September, it has been a mere Rs.8,000 crore. Clearly, the banks are more comfortable with the liquidity conditions.
The government has borrowed Rs.3.09 trillion or 54.2% of the annual gross amount so far. Its net borrowing has been Rs.2.34 trillion, or 48.9%. On 22 September, there will be redemption of bonds worth Rs.11,000 crore and another Rs.5,000 crore will come up for redemption in November. But the money released through redemptions will be soaked up by new bonds. Besides, around Rs.50,000 crore will leave the system when Indian corporations pay their advance income tax in mid-September. This means the comfort on the liquidity front will not last long and not too many banks may feel encouraged to cut deposits rates and eventually loan rates.
At the same time, the system may not see the kind of liquidity tightness that it had witnessed last year. The government will start spending in the second half of the year and that will neutralise the impact of advance tax outflow.
One reason behind SBI’s decision to cut the deposit rates could be the lack of credit offtake. All banks have been shedding their high-cost bulk deposits in the absence of credit offtake. Till 10 August, year-on-year, credit offtake has been 16.5% against 20.3% in the previous year. Deposit accretion too has been less than the previous year but in the absence of credit offtake banks are deploying money in government bonds.
If indeed the credit offtake picks up in the second half of the year, there may not be any scope to cut deposit rates further and the base rate cut may still remain a mirage. Unless, of course, the banks bite the bullet, nudged by the finance ministry’s moral suasion.
One thing is for sure though—with RBI actively managing liquidity, banks will not be starved of money this year. Until now, the central bank has infused Rs.81,580 crore through its bond buying programme or so-called open market operations (OMOs). It will continue to conduct OMOs to keep the cash deficit in the system within 1% of bank deposits, around Rs.63,000 crore, which has been its stated objective.
In sum, SBI’s deposit rate cut could be an isolated event and it’s too early to expect a base rate cut by banks even though we may not see a severe liquidity crunch.

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