Bank of Baroda to decide on cutting lending rate tomorrow

MD Mallya, chairman and managing director, Bank of Baroda told CNBC-TV18, they would take a decision on lending rate cut by tomorrow. However, the quantum of rate cut will depend on the overall liquidity position and cost of the funds.

"Going by what RBI has announced in terms of repo cut it is quite evident that we are seeing moderation as far as the interest rate scenario is concerned," he added.

Below is the edited transcript of Mallya’s interview with CNBC-TV18. Also watch the accompanying video.

Q: Has the bank taken a decision either with regards to what to do on your lending rates and whether or not to cut deposit rates as well?

A: No we would be taking a decision soon. The Asset Liability Management Committee (ALCO) has to meet and then take a call on that. But, going by what RBI has announced in terms of repo cut it is quite evident that we are seeing moderation as far as the interest rate scenario is concerned.

Q: Some of your peers have cut rates by 25 bps. Is it likely that you will also do a rate cut of that quantum and why is the transmission not full? From a 50 bps repo cut why are rates going down only 25 bps can you explain that to us?

A: As far as the RBI stance is concerned, it is quite clear that we are seeing a moderation in the interest rates, therefore it is quite evident that the transmission would take place. As far as the quantum of the rate cut, which banks are likely to do, depends on the overall cost of resources coming down.

Therefore, evidently the cost of deposits would also come down and then it will take some time and with the lag effect one could see the overall interest rate on the lending also coming down. To start with may be a 25 bps is what some of the banks have done yesterday. Once the real reduction in terms of cost of deposits is seen, one would look at the moderation of interest rates further if any. But it all depends on the overall cost of funds.

Q: I want to pick on that ‘if any’ because will your cost of deposits come down very much in this current scenario because the banking system has been struggling to get fresh deposits, other competing products seem to be doing better in terms of tax efficiency and return. In such a scenario do you think you can continuously lower your deposit rates enabling you to pass down in lending rates?

A: As far as last year is concerned because inflation was ruling high, the real interest rate to the customer was less or rather the banks had to price the deposit rates slightly higher. Now that we have seen a moderation in the inflation numbers and the liquidity overall in the system is likely to stabilize and quite comfortable, one could see the overall pressures as far as the deposits are concerned coming down. Therefore, one could look at the deposit rates also coming down significantly.

So that would give a comfort for the banks in terms of reduction in the overall cost of funds, which could be passed on to the customers. When we talk in terms of the overall reduction in the lending rates, we need to look at two things, one is the base rate per se where we are talking in terms of a cut of around 25 bps, but more importantly we need to see the spread over the base rate. Perhaps a contraction of that also could be seen as we move forward if the overall scenario is comfortable.

Q: We believe the State Bank of India (SBI) team will be meeting either later this evening or early next week to decide on what they want to do with rates. Is it possible that most banks are waiting for SBI to move and is it also possible that if SBI chooses to move by as much as 50 bps many banks will have to extend the amount of cuts they have announced?

A: As far as we are concerned, ALCO will meet either today or tomorrow and the decision will be taken in the current week itself. The quantum of rate cut will depend on the overall liquidity position of the individual bank and the overall cost of the funds they have.