Mumbai: Nudged by the Reserve Bank of India, leading banks, State Bank of India, ICICI Bank and HDFC Bank, on Tuesday cut their lending rates.
While SBI and HDFC Bank cut rates by a token 0.15%, ICICI Bank slashed its lending rate by 0.25% after the central bank maintained status quo on policy rate.
The action of the two banks could have a snowballing effect forcing others to follow suit, a move that can bring relief to corporate and retail borrowers including of home and auto loans.
After two cuts in three months, the RBI kept the repo rate, at which the central bank lends to banks, unchanged at 7.5% on fears of unseasonal rains impacting food prices.
The cash reserve ratio, which is the amount of deposits parked with the central bank, will remain at 4%. Bank rate has also been retained at 8.5%.
“I do not see an environment where credit growth is tepid, banks are sitting on money and their marginal cost of funding (has) fallen, the notion that it hasn’t fallen is nonsense, it has fallen,” Rajan said.
After his announcement and plain-speaking, leading bankers including SBI Chairman Arundhati Bhattacharya initially maintained that it takes time to lower the lending rates, which could happen in two or three months.
Hours later, SBI took the lead in effecting the rate cut, followed soon by HDFC Bank, whose CEO Aditya Puri had also hinted earlier in the day that it would take some time for rates to be cut by the lenders.
Bhattacharya later said she expected other lenders to follow suit by cutting their rates, as it was a competitive market. She also hinted at lowering of deposit rates.
On possibility of more cuts, she said, “I think there is an elbow room, but it all depends on credit growth pick up. We really want to see that happening.”
RBI has surprised the markets with two rate cuts of 0.25% each outside the scheduled review meetings in 2015, but banks have yet to respond to these policy rate cut by lowering their lending rates.
After the policy announcement, bankers said most of them will have their asset liability committee meeting next week to take a call on interest rates which besides repo rate depends on factors like demand for credit, cost of fund and deposit rates.
“We would see rates coming down as we see easing of interest rate cycle,” Bhattacharya said.
On the reluctance of banks to pass on the benefit of 0.50% rate cut announced by the central bank since January, Rajan said, “We are not looking for a specific number (on the bank rate cuts) and saying unless this happens, nothing more will happen. But we want to facilitate the process of transmission.”
“Given that there has been very little transmission from rate cut so far… we are waiting to see transmission take place… I have no doubt that this will happen. If it happens sooner it is better for the economy,” he told reporters after the announcement of first bi-monthly monetary policy.
“The Reserve Bank will await the transmission by banks of its front-loaded rate reductions… into their lending rates,” the central bank said.
HDFC Bank’s Puri said the base rate cut is a function of the deposit cost.
“If the deposit cost goes down, then there will be a base rate cut. If it doesn’t there won’t be any base rate cut. However we feel between now and June, there should be repricing of cost and that will lead to a lower cost of funds for borrowers,” he said.
On the issue of bad loans, bankers lobby IBA chairman and Indian Bank head T M Bhasin said the lenders are optimistic that coming quarters will be better than the past few years, while other bankers refused to specify saying this is the silent period.