Loans set to get cheaper, deposits to earn less

Get ready to pay lower loan instalments. Banks are gearing to pare their lending and deposit rates, a day after the Reserve Bank of India (RBI) signalled a reversal in the interest rate regime by cutting the key policy rate 50 basis points (bps).

State-run IDBI Bank on Wednesday announced a cut in the base rate — to which loan rates are linked — by 25 bps to 10.5 per cent. It also announced a reduction in the benchmark prime lending rate — the erstwhile benchmark rate, to which loans taken before July 2010 are linked — by 25 bps to 15 per cent. The bank will reduce deposit rates by 10-50 bps across various maturities.

“The impact of the rate cut on the margin will be neutral, as we have adjusted the interest rates on assets as well as liabilities,” said P Sitaram, chief general manager.

State Bank of India (SBI), the largest lender in the country, indicated it would lower lending rates by 25-50 bps in a couple of days. SBI has one of the lowest of base rates among banks and may not cut it, but may reduce spreads over the base rate.

According to a senior SBI official, the bank might decide to offer lower rates in the next few days on segments such as small and medium enterprises and in retail categories such as automobile loans. However, it may take a month or so for the base rate to fall, as the banks would first like to revise the deposit rate. “Base rate will be revised once the overall cost of funds fall. And, that will happen once we lower the deposit rate,” the official added.

Other state-run lenders Central Bank of India (CBI), Indian Overseas Bank (IOB) and Andhra Bank are in the process of evaluating their cost of funds in their Asset-Liability Committee (Alco), after which they’d come out with rate revision announcements.

“Our Alco is meeting tomorrow to decide on the lending and deposit rates,” said V R Iyer, executive director of CBI. “We have not decided on the quantum of the cut. We are considering a cut in the base rate as well.”

Similarly, IOB chairman and managing director M Narendra said the bank would bring down the deposit rate before taking a call on lending rates. “Cost of funds needs to come down first and for that, the deposit rates would be cut by, say, 25-50 bps. The base rate would come down only after some time. However, we might bring down the lending rates on some selected segments,” he said. Andhra Bank said it would focus on bringing down the cost of funds by first lowering the deposit rates before taking a call on lending rates. “We would take a call on lending rates in June. The cost of fund needs to come down first,” said B Prabhakar, chairman and managing director.

Source: Business Standard