Banks started pruning deposit rates within hours of the Reserve Bank of India’s decision to cut repo and reverse repo rates to all-time lows. Lending rates are unlikely to come down immediately.
In addition, the cash reserve ratio, or the proportion of deposits that banks set aside, will cut 50 basis points — the lowest since February 2006 — from the fortnight starting January 17 to inject additional liquidity of Rs 20,000 crore into the system.
The move also helps banks earn income since RBI does not pay interest on funds set aside for CRR requirements.
The reduction in the repo rate, or the rate at which RBI lends money to banks, to 5.5 per cent and the reverse repo rate, the rate at which RBI absorbs liquidity from banks, to 4 per cent are applicable with immediate effect, the central bank said in a statement.
“Banks should price risk appropriately and ensure that quality enterprises continue to get funding. RBI appreciates that risk management is difficult even in normal circumstances; it is more difficult in an environment of uncertainty and downturn,” the statement added.
This is the fourth round of rate cuts announced by the central bank since the global credit crisis intensified in September following the collapse of US financial institutions led by Lehman Brothers. Since October, CRR and the repo rate have been lowered 350 basis points each. In the past four weeks, the reverse repo rate has come down 200 basis points.
Taking a cue from the series of moves by RBI, banks pared rates. Public sector banks cut their benchmark prime lending rates up to 200 basis points, and private banks 50 basis points. The decline in deposit rates has been steeper with some banks lowering rates over 200 basis points for certain maturities.
Those like Union Bank of India decided to lower deposit rates 25 to 135 basis points across maturities from January 5 and said it will decide on reducing its BPLR next week. In Kolkata, Allahabad Bank said it will cut its BPLR 75 basis points to 12.50 per cent with effect with January 5.
O P Bhatt, chairman of State Bank of India, the country’s largest bank, said: “We will definitely review our rates, on both the lending side and the deposit side in our Assets and Liability Committee and, as we have done in the past, we will take a lead position on this also.”
ICICI Bank, India’s second-largest lender, did not indicate whether it will cut rates. However, Joint MD & CFO Chanda Kochhar said: “These measures will accelerate the move to a lower interest rate regime across the system.”
Some lenders such as IndusInd Bank, which have not pared rates so far, are expected to do so now. Others are expected to wait because as the latest reduction in lending and deposit rates by banks was applicable from this week. Banks that have already reduced rates indicated that they will cut deposit rates in the coming weeks and then lower lending rates.
“The banking system is headed towards a cheaper rate regime. We will cut benchmark lending rates in two tranches. We may cut our rates at least 50 basis points in the first tranche in eight to ten days and further cuts will be made in the next tranche with a 15-day lag. But deposit rates will be reduced by a similar scale before we cut lending rates,” said IndusInd Bank MD & CEO Romesh Sobti.
IDBI Bank has not cut lending rates so far and there were no indications whether it will do so now. “The problem is not of availability of credit but demand. Credit is available for viable proposals,” said the bank’s CMD Yogesh Agarwal.
“RBI wants to ensure that there is ample liquidity in the banking system. The CRR cut will help soften the cost of deposits, which would encourage banks to lend with more comfort towards both retail and corporate borrowers,” said HDFC Bank’s Head (Trading), Tarini Vaidya.
“Our asset-liability committee (Alco) will take a decision on further rate cuts only after assessing the impact on our cost of funds due to these liquidity measures. There will definitely be a reduction in cost of funds with these measures, but it is too early to quantify a cut in our lending or deposit rates,” Vaidya added.
The bank’s Alco is expected to meet in the next two weeks.