A good decision, says Canara Bank CMD

Mr S. Raman, Chairman and Managing Director, Canara Bank: It is a good and decisive move by the RBI. Given the limited space available, the RBI has come up with a good decision. Transmission of rate cut to customers should be possible in the next few weeks. But it also depends on reduction in deposit rates. Deposit rates have to come down first as the cost of deposits had increased significantly; hopefully it would happen very soon. Our ALCO will take a call on interest rates on lending and deposits.

Ms Upasna Bhardwaj, Economist, ING Vysya Bank: The RBI’s move clearly reflects its intention towards propelling growth as core inflation provides some signs of relief. However, latent factors continue to provide upside risks to inflation. Such an aggressive step amid persistence of price pressures is likely to keep the RBI on pause in the mid-quarter review in June and subsequently monitor the growth-inflation dynamics to determine its path.

With the current action, we expect the banks to pass on the change via reduction in lending rates, though only gradually.

Mr M. Narendra, Chairman and Managing Director, Indian Overseas Bank: It is a very positive move by the RBI, which would facilitate investment activity. It is a sentimentally positive move. Unless the inflation gets further reduced, I don’t see any further rate cut by the RBI.

Banks have to first work at reduction in deposit costs, and then base rate will also come down. But I feel that it will take at least three months’ time for deposit rates to be moderated, it cannot be done immediately.

The RBI’s repo rate cut is only a signal, and that doesn’t lower the cost of funds automatically. But this signal will excite the investment activity.

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RBI tightens norms for bank lending to gold loan cos

Non-banking finance companies in the gold loans business may find the going tough when it comes to raising loans from banks.

The RBI has directed banks to reduce their regulatory exposure ceiling to a single NBFC, having gold loans to the extent of 50 per cent or more of its total financial assets, from the existing 10 per cent to 7.5 per cent of bank’s capital funds.

“There has been a significant increase in loans against gold by non-banking financial companies in the recent period, which has raised several concerns,” the RBI said in its Annual Monetary Policy for 2012-13.

The central bank also said that banks should have an internal sub-limit on their aggregate exposure to NBFCs having gold loans to the extent of 50 per cent or more of their total financial assets, taken together.

The RBI has constituted a Working Group to undertake a detailed study of gold demand, trends in gold prices and lending by NBFCs against gold.

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SBI to cut lending rates soon

State Bank of India (SBI), today said it will “do a comprehensive cut” in lending rates on various loans following the Reserve Bank of India’s 0.5 per cent reduction in repo rate.

“Of course, there would be a transmission. The transmission of last CRR (cash reserve ratio) cut has also not happened fully because that came in March. We thought we would wait till (April) 17th and do a comprehensive cut,” the SBI Chairman, Mr Pratip Chaudhuri, said after the RBI unveiled its annual credit policy.

Lending rate cut

“It (a lending rate cut) will not be across the board, it will be particularly for segments where the mark up above the base rate is significantly high,” he said.

Asked if there will be a substantial reduction in interest rates, he said: “Yes it will be.”

Base rate, the minimum lending rate below which a bank cannot lend, of SBI stands at 10 per cent. SBI’s base rate is the lowest in the industry.

Last month, the RBI slashed CRR (Cash Reserve Ratio) — the percentage of deposits that banks have to keep with the RBI — from 5.5 per cent to 4.75 per cent. With this, the central bank had infused Rs 48,000 crore into the economy.

“So largely it would be in our case for the SME but it is for our ALCO (asset-liability committee) which is meeting today evening to take a call,” he said.

“But we have to look at some other parameters to take a final call on passing on the rate cut to borrowers. But it will happen very soon,” he added.

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RBI could have cut CRR too: KVB chief

“The RBI has the habit of springing a surprise. Though the market expected a 25 basis points cut, I expected a 50 bps cut in the repo rates,’’ said the Managing Director and Chief Executive of Karur Vysya Bank, Mr K.Venkataraman.

He, however, felt that it could have been more enhanced if it had come with a 25 bps cut in the Cash Reserve Ratio (CRR) as well.

(CRR refers to the liquid cash that banks have to maintain with the RBI as a certain percentage of their demand and time liabilities).

According to him, a 25 bps cut in repo rate would not have made any impact as the problem of liquidity persisted.

Asked if KVB would pass on the reduction to its customers, he said “this definitely gives room for reducing both the deposit and lending rates. But unless the general rate scenario comes down, a reduction in the rate will not be possible.’’

Karur Vysya Bank, according to Mr Venkataraman, did not face any liquidity problem. “But funds have become costly because of tightening measures. Investments have slowed and there is no point in keeping the funds locked up,’’ he added.

‘It’s more than what was expected’

While the KVB chief maintained that he expected a 50 bps cut in repo rates, Mr V.P. Iswardas, Chief Executive and Managing Director of Catholic Syrian Bank, said “it is more than what was expected’’.

CSB has, only a fortnight ago, effected a 25 bps cut in its deposit rates. “We will therefore review our stand in the next ALCO (Asset Liability Committee) meeting,’’ he said, when asked if the bank would be passing on the reduction to its customers.

According to him, there was no dearth in the flow of NRE deposits. “It continues to flow. We have made some minor corrections on the NRE deposit rates too. The rates are more or less equal to our domestic term deposit rates,’’ he added.

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RBI abolishes prepayment charges on home loans

The RBI announced measures that will help home loan customers. Particularly, those who feel shortchanged when they don't get the benefits of lower interest rates.

It has now removed charges and penalties for foreclosure/prepayment of home loans taken on floating interest basis.

The removal of foreclosure charges/prepayment penalty on home loans will lead to a reduction in the discrimination between existing and new borrowers and the competition among banks will result in finer pricing of home loans with the floating rate, the RBI said.

The Damodaran committee on customer service found that banks were hesitant in passing on the benefits of lower interest rates to the existing borrowers in a falling interest rate scenario. The RBI said that foreclosure charges are seen as a restrictive practice deterring the borrowers from switching over to cheaper available source.

Variation in interest rates on deposits to be minimal

The RBI has stipulated, that banks should not discriminate in the matter of interest rate paid on deposits, except in respect of fixed deposit schemes specifically meant for resident Indian senior citizens and single term deposits of Rs 1.5 million and above.

However, there are wide variations in banks’ retail and bulk deposits rates, making it unfair to retail depositors. Further, banks are offering significantly different rates on deposits with very little difference in maturities. This suggests inadequate liquidity management system and inadequate pricing methodologies.

The RBI has therefore, advised that banks should have a board approved transparent policy on pricing of liabilities.

Call it by a different name

Given the stigma attached to no-frills accounts and banks' tendency to mechanically try and meet the targets, the RBI has come up with a variation called a ‘basic savings bank deposit account’.

UID for everyone

Banks are being advised to initiate steps to allot a unique customer identification code (UCIC) number to all their customers.

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