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Rediff.com  » Business » Banks say no room to cut lending rates, thwarting RBI easing

Banks say no room to cut lending rates, thwarting RBI easing

By Suvashree Choudhury
January 30, 2015 17:16 IST
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Only three of India's 45 commercial banks have cut base lending rates since the Reserve Bank of India's surprise easing this month, hurting the government's drive to lift business investment. 

Bank executives insist they cannot lower loan rates despite the official rate cut because cash conditions are tight, and money markets are little changed since the cut, but RBI insiders see that as more an excuse to protect profit margins. 

The failure to pass on the January 15 rate cut to businesses and consumers has both diluted the impact of monetary policy and weakened the push by the government to quickly unlock more credit and spur investments as the economy struggles to recover from its slowest growth rates since the 1980s. 

"We are already providing liquidity higher than what the banking system requires. We do not plan to increase that amount," said a senior policymaker with knowledge of the RBI's cash management strategy. 

"Banks need to manage their assets and liabilities more efficiently," he added. 

Bankers say the average funds the RBI provides the market has been steady at around 1 trillion rupees ($16.2 billion) a day since the repurchase (repo) rate was cut by 25 basis points to 7.75 percent. 

The RBI manages the amount of liquidity in the market to aid transmission of its rate decisions. The next scheduled policy review is on Tuesday, but analysts do not expect it to ease again at least until after the federal budget at the end of February. 

"If RBI provided slightly more liquidity than what it is providing now, it will force banks to cut their base lending rates," said C. V. R. Rajendran, chairman and managing director at state-run Andhra Bank. 

The rate cut has had little impact in financial markets, suggesting a blockage in policy transmission. 

The interbank overnight cash rate, a key measure of cash conditions that tends to track the repo rate, has remained around 8 percent despite the rate cut. 

Furthermore, three-month wholesale deposit rates have held near 8.50 percent and the one-year wholesale deposit rate has risen 10 basis points to 8.60 percent. 

Analysts say the RBI will eventually have to inject more funds, although may not as much as lenders want, if it continues easing monetary policy. 

Bank of America-Merrill Lynch believes the RBI will need to inject around $49 billion in new money to the banking system during 2015/16 (April-March) if lenders are to lower lending rates enough to meet the brokerage's projections for a recovery in credit growth to 17.5 percent in the next fiscal year. 

Credit grew at an annual rate of 10.7 percent in early January, near decade lows, and the government of Narendra Modi's government has been seeking lower interest rates to help spark a revival in lending to business. 

Earlier this month, the RBI mandated that lenders change the methodology used to compute the base rate, or the minimum lending rate, in a bid to spur more lending. 

Banks continue to suffer from deteriorating asset quality, which is pressuring earnings. Bank of Baroda , India's second-biggest lender by assets, on Friday posted a 69 percent fall in quarterly profit due to higher provisions for bad loans and a surge in tax expenses. 

An executive at a state-run bank acknowledged profit was a factor in the reluctance to lower lending rates but said liquidity was a bigger issue. 

"There is a lot of micro-management of liquidity by RBI. Banks are taking their own time to cut lending rates because we are still not sure about RBI's liquidity policy," he said. 

"Typically banks are faster in raising lending rates than cutting to enjoy fat interest margins."

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Suvashree Choudhury
Source: REUTERS
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