Lending, deposit rates unlikely to go up immediately, say bankers

Borrowers may get a respite from rising rates, but depositors may be in for some disappointment. Banks are unlikely to increase either lending or deposit rates immediately, despite the Reserve Bank of India raising key short-term rates by 25 basis points.

Even savings bank deposit holders hoping to see an increase in interest rates following the de-regulation in SB rates may have to wait a while, as bankers don't expect interest rates to go up immediately. However, transaction costs could go up as a result of the de-regulation, bankers added.

The slowdown in credit demand and the good inflow into retail deposits leading to a comfortable liquidity situation have taken the pressure off banks to offer higher deposit rates to attract more funds, said bankers, speaking to reporters after the meeting with the RBI governor, on Tuesday.

Lending, deposit rates

Mr Pratip Chaudhuri, Chairman, State Bank of India, said that banks are unlikely to raise lending rates immediately. “Our compulsion to raise the rates on the lending side would happen only if deposit costs go up. As of today, all banks are seeing good inflow of retail deposits and liquidity is plentiful. And credit demand is not very strong. So, if deposit costs don't go up, there is no immediate need to raise lending rates.''

The loan growth so far has been funded by the normal inflow in retail deposits, he added. “We will have to increase lending rates only if loan growth picks up in the busy season. In the current situation, most of the banks, at least SBI, have a lot of liquidity. In fact, we are thinking of reducing liquidity,” Mr Chaudhuri said.

Mr M.V. Nair, Chairman and Managing Director, Union Bank of India, said that with the rise in repo rates and the de-regulation in SB rates there is an indication of an upwards movement in interest rates. But since the RBI's stance also indicates that further hikes may not happen and a distinct possibility of inflation coming down to 7 per cent, banks will have to weigh all possibilities before hiking lending rates.

“The RBI's policy stance indicates that going forward pressure on inflation and consequently, on interest rate may come down. Therefore, the decision on hiking lending rates has to be taken after considering the pressure on margins that corporates face, especially the small and medium enterprises. So we need to debate this and take a view,” he said.

SB de-regulation

With regard to the SB rate de-regulation, Mr Chaudhuri said most banks are not in a hurry to hike the interest rates on S/B accounts as the liquidity is comfortable. So they would not be very keen or desperate to raise the rates and lose the cost advantage. In any case, depositors looking for higher yields have moved into fixed deposits or into liquid mutual funds.

“Large value SB depositors are moving into the sweep accounts. So we do not think customers are using SB only for the yield. They are using SB for convenience. Unless there are other competing pressures, as of now, the SB rate would continue where it is, at 4 per cent,'' he said.

SB accounts are used by depositors largely as a transaction vehicle and not to earn interest, said Mr Aditya Puri, Managing Director, HDFC Bank. Customers will also consider the advantage between higher return and the service the bank offers before switching from one bank to another for higher SB rates, he added.

“If SB rates go up one per cent, then the difference you (depositor) would gain in the SB account, which has, say, Rs 10,000, is Rs 100 for a year. It is Rs 8 per month. How much are you willing to sacrifice for the service,'' he said.

If SB rates do go up by 100 basis points or one per cent, then banks' margins would be impacted by 25 basis points at the most, as most banks have a 50 per cent share of current accounts in their CASA accounts (current account, savings accounts). The impact on net earnings of banks could be 10 basis points, Mr Puri added.

Banks with smaller savings deposits to benefit

Mr Uday Kotak, Vice-Chairman and Managing Director, Kotak Mahindra Bank, said the de-regulation in SB rates would lead to an increase in savings bank deposit rates. “Yes, it will lead to increase in savings deposit rates. I think better savings rate for customers. But it is too early to say by how much,” he said.

“It will benefit banks with smaller savings deposits. For us savings deposit is less than 10 per cent of our total liabilities, so we have greater flexibility,” he added.