Banks set to Slash Interest Rates in the Next Few Days

Banks are set to slash interest rates in the next few days as they walk in lockstep with the administration to lift the spirits of borrowers after the dislocation caused by demonetisation and the 50 days sought by PM Narendra Modi come to an end.

Bankers said that the reduction in lending rates could be accompanied by a sharper cut in deposit rates. Large commercial banks presently pay about 7 per cent for one-year deposits and charge 8.9% for loans of the same tenor. A senior bank official stated the government had sought to persuade banks to lower rates on the grounds that the cost of deposits had dipped because of demonetisation and the benefits should be passed on to the customers to boost consumption.

A senior bank official said that investment sentiments were low and the government was under tremendous pressure from the Opposition to showcase that demonetisation had paid off. Secondly, the common man was hoping that after going through a 50 days test, he should get the benefits of demonetisation. Therefore, the government was in dialogue with banks on measures that could be taken to boost investments, he added.

Large banks have planned to hold meetings of their asset-liability committees, who decide interest rates on loans and deposits. In the past, banks have lowered lending rates, or the MCLR – marginal cost of lending rates, by increments of 5 and 10 basis points (bps) in the process of transmitting monetary policy cuts. A basis point is 0.01 percentage point. A bank chief stated a few large banks might announce a steeper cut this weekend because of huge flow of deposits and poor credit demand.

Reserve Bank of India (RBI) data show bank credit rose 1.2 per cent to Rs 73 lac cr in the fiscal year to date — 1st April to 9th December — much slower than the 6.2 per cent rise to Rs 69.6 lac cr in same period a year ago. Deposits rose 13.6 per cent to Rs 105.9 lac cr compared with a 7 per cent rise to Rs 91.8 lac cr in the year earlier.

The chiefs of large commercial banks like Indian Bank, Pnb and others are to meet to discuss other measures that could be taken to boost investment enveloping possible infrastructure loan plans apart from rate reduction.

Banks mobilized Rs 12.44 lac cr in deposits in about a month since demonetisation. That compares with the average Rs 9 lac cr that banks get by way of incremental deposits in a financial year.