Banks may not cut interest rates anytime soon, despite a 25 basis point-reduction in the repo rate, the rate at which RBI lends to banks. Hence, there will be no immediate relief for your equated monthly installments (EMIs) be it for home or auto loans.
Similarly, companies will have to wait for some more time to get cheaper loans and so are their growth plans at a time when country's GDP growth hit 15 quarter low at 4.5%.
"A CRR cut gives immediate benefits while repo cut effects come with a lag," Diwakar Gupta, MD & CFO, State Bank of India (SBI) told moneycontrol.com.
"No doubt, repo cut is good. We will get its advantages through RBI borrowing window, refinancing and mark-to-market gains in bond yields. However, these will happen gradually. Right now, banks cannot afford any further rate cut. The entire industry is bearing the burden of high cost bulk deposits," he said.
Cash Reserve ratio or CRR is the portion of deposits (4%) that banks keep with RBI. The central bank had last decreased it by 25 bps on January 29, 2013. The move had injected an additional Rs 18,000 crore liquidity into the system. Banks do not get any interest on their CRR obligation.
Some banks have bulk deposits (generally above Rs 1 crore) to the tune of 30-35 per cent of their balance sheet. They are paying high cost for those schemes. This in turn erodes the net interest margin or the difference between interests earned and paid out.
However, SBI has currently bulk deposits at around 1.5 per cent of its balance sheet. The bank had reduced its base rate by 5 bps to 9.70 per cent in January, apparently to equalize the lowest rate offered by HDFC Bank at that time.
"To what extent we will be able to really transmit is a question," said V Iyer, chairman and managing director, Bank of India.
"We need to look at it. As of now we are also facing the tightness in raising the pace of deposit growth. In fact in some of the tenders we have had to increase the rate of deposit on the retail front. So given the current context and the circumstances immediate transmission may not be possible. We may have to wait for a month or two to look into how much we can do," she said.
Banks are struggling to garner public deposits, the cheap source of funds for them. Till first week of March, 2013; the industry deposits grew at slower pace of 12.70 per cent year-on-year as against more than 16 percent credit growth. The credit-deposit ratio hit historic high at 78.13% in the third week of February.
"We say every alternate policy is a non-event. If policy is a serious measure why we want to reduce it to event management company kind of thing?" quipped S S Mundra, chairman and managing director – Bank of Baroda.
"Today with the announcement of policy there is a certain direction which is visible to us. It has to be merged with the other factors and that is why as far as the residual part of March is concerned I do not see a possibility of any immediate transmission action, but come April or somewhere nearer the mid-April there would be a much greater clarity on the liquidity position," he told CNBC TV18.
Since last couple of weeks, banks on an average have been borrowing more than Rs 1 lakh crore daily from RBI Liquidity Adjustment Facility (LAF), which is much above its comfort zone at around Rs 60,000 crore or 1% of net demand and time liabilities. Since last one year, RBI has cut repo rate by 100 bps and CRR by 50 bps.
Banks’ base rate at a glance:
Base rate (%)
Punjab National Bank
N.B. No bank can lend below the base rate.