Will banks reduce lending/deposit rates?

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MUMBAI: Monetary easing by Reserve Bank of India (RBI) clearly indicate that bankers must address the problem of moderation in credit growth, lower lending rates, and, at the same time, maintain credit quality. Will banks respond adequately?

RBI's cuts in key policy rates and cash reserve requirement for banks is seen as reason enough for banks to pass on the benefits to consumers. Credit offtake has slowed down substantially in recent weeks with loans growing 12% between April 1 and December 19 - only slightly higher than 10% growth in the same period last year. Growth in non-food credit has also decelerated due to slowing in economic activity. It is expected that the reduction in the policy interest rates and CRR will further enable banks to provide credit for productive purposes at appropriate interest rates, RBI said on Friday.

RBI FOR CREDIT GROWTH

* RBI urges banks to lend more, lower rates

* Banks need to pass on lower rate benefit to consumers

* No significant pick-up in loan growth FY09 so far

* Credit growth up 12% Apr 1-Dec 19 vs 10% (YoY)

Most bankers are of the view that the reductions were a pleasant surprise, and that its a signal from the central bank to bring down loan and deposit rates. Some banks, however, are unlikely to budge any time soon. Worries over asset quality of credit portfolios are a key factor that could hinder banks from reducing their lending rates. Also banks have recently reduced their deposit rates by up to 100 basis points and lending rates by 75 basis points.

Nevertheless, PSU banks may take the lead in bringing down interest rates as they have an additional responsibility of meeting their increased credit targets. It is expected that lending rates could come down by 75-100 basis points, while deposit rates by 50-75 basis points by March-end.

Ananlysts believe that any further easing of policy rates is unlikely at the January policy review, but more action cannot be ruled out at the April policy announcement. Thus, as far as yields  are concerned, sentiment is expected to remain bullish with the 10-year benchmark yield falling to 4.50% by April from the current 5%.