Indian Banks Are In For A Round Of Rate Cuts
Tuesday, February 15 10:35 PM SGT
BOMBAY (Dow Jones)--Indian banks face a round of rate cuts after the State Bank of India (P.SBI) cut its deposit rate, but lending rates won't come down until the central bank gives a clear signal to do so, bankers said Tuesday.
"After SBI cut its deposit rates, other banks are bound to follow," said K.C. Chakraborti, deputy general manager at Bank of Baroda.
The State Bank of India, the country's largest commercial bank, Saturday cut the interest it pays on deposits of one year or more by one percentage point. The move came after the government lowered Jan. 14 the rates it pays on its highly popular Public Provident savings plan by one percentage point to 11%.
Chakraborti and a senior official at the Bank of India said their banks were likely to cut deposit rates in the next few weeks, but lending rates wouldn't be lowered until the Reserve Bank of India cuts its so-called bank rate. This is the rate at which the RBI lends to other banks.
A senior official at the State Bank of India said banks won't cut lending rates on their own because it directly hits their margins.
"Deposits are at fixed rates, while our lending is usually at floating rates," he said, adding that most banks are stuck with high-cost deposits.
Lending Rates To Be Cut After Budget
Analysts say that while the RBI has indicated that a cut in the bank rate may be appropriate, it is worried about the impact that will have on banks' margins, especially in view of the severe competition they face from mutual funds.
But bankers say the lending-rate cut can't be postponed for long.
"There is pressure from our customers to cut the spread on the prime lending rate," the Bank of India official said.
Chakraborti said yields on government bonds have already declined by nearly one percentage point since Jan. 14 and corporate bonds have fallen too.
"An across-the-board fall of rates is imminent," he said. "If banks don't cut lending rates, corporates will simply raise from the market."
The SBI official said any cut in lending rates will happen only after the government unveils its budget for 2000/2001 Feb. 29.
"The initiative must come from the government," he said. "The fiscal deficit is so high. The government is such a big borrower. It plays a key role in determining the pressure on liquidity and on rates."
The SBI official said rates will fall only if the government announces a lower deficit and a lower market- borrowing target for the coming year.
The bankers said it was difficult to say by how much lending rates would be cut once the central bank decides to lower its bank rate.
"It will differ from bank to bank," the SBI official said. "It will depend on their NPLs (non-performing loans), their non-operations income and other fixed costs." |
