Change in base rate to depend on deposit rates: HDFC Bank

HDFC Bank has cut its minimum lending rate by 20 basis points, effective today. Speaking to CNBC-TV18, Paresh Sukthankar, Executive Director, HDFC Bank said that any change in base rate will depend on deposit rates, which in turn depends on liquidity. He further added that banks will cut deposit rates only if the liquidity situation improves.

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

Q: What prompted HDFC bank to cut the base rate by 20 bps?

A: The calculation for base rate is a function of not just the deposit rates, but the glossed up cost which really incorporates the cost of the reserves. Then of course, we have some market rate and the rest of the calculation hasn't really changed.

But with the CRR cuts earlier in the year and some small difference in the SLR yields, the final number came lower by that much. We, therefore, reduced it. Every quarter this has to be reviewed, and this quarter, when we reviewed it we found it came to 9.8% and that’s how the reduction from 10% to 9.8%.

Q: Is there a feeling that things might soften a bit more and that you may perhaps have a situation of cutting rates further maybe in a quarter?

A: Any further change from here will be dependent on what happens to deposit rates, because that is the largest influence on the entire calculation. The outlook for change in deposit rates depends a lot on what happens to liquidity.

LAF borrowing has come down from well over a Rs 1,01,000 crore to somewhere in the Rs 90,000 crore. I guess with the release of the export refinance today, it might come down further to maybe closer to Rs 75,000-80,000 crore. It's still at a level where I don't think banks will be comfortable dropping deposit rates.

So you will first have to see a further improvement in liquidity, which makes banks comfortable enough to drop deposit rates and then that would be the earliest that you could hope for any further cuts in base rates.

Also read: HDFC Bank to cut lending rate to 9.8%; stk hits 52-wk high

HDFC Bank cuts base rate and BPLR by 20 bps

Q: This means your cost of funds has come down and that has prompted your base rate and your margins remain unchanged. There will be no impact on your Net Interest Margins?

A: Whatever has been the reduction in the effective cost, effective meaning not just the interest we are paying on deposits but the grossed up cost after maintaining reserves, the saving in that is what has been passed on.

Q: With this 20 bps reduction in the lending rate, do you expect an improvement in your credit growth? What are your expectations for FY13?
 
A: To be honest, our growth expectations have been more linked to what the system does and the fact that we typically have outpaced the system by a certain margin. In our own current balance sheet, about 20% of the loan book is linked to the base rate.

So it's not a very large component of the balance sheet. At the margin, I am not sure whether the sensitivity to 20 bps is huge. So there are several other factors in terms of the basic demand conditions in the market. The overall rate level rather than just this 20 bps is going to be a huge mover.

Q: We hear slowdown news all over the place, every number. Today's auto sales number is particularly unnerving. Will you be forced to perhaps cut lending rates without a fall in deposit rates like SBI and other banks are doing for selective segments?

A: I will answer that in two parts. One, if you are right that a lot of this noise about the slowdown and the numbers sort of seem to come through, but surprisingly enough credit growth seems to be at divergence of that. So the last numbers which came out actually moved up.

Clearly, whatever has been the moderation in growth rate in the real side of the economy hasn't as yet translated to any meaningful moderation in growth rate on the lending side.

Quite independent of that actually when you look at at least the reduction in base rates, there maybe some fixed rates which people could move based on the concretive scenario, but the base rate calculation, because it is supposed to ensure transmission from deposit rates to lending rates.

Conversely, if somebody wants to drop the base rate, logically one would have to simultaneously drop deposit rates otherwise the formula doesn't quite work out. I know that one has heard that banks have sometimes dropped base rates in anticipation of dropping deposit rates.

I am not sure whether that's exactly what the mechanism would have sort of wanted in the first place. But clearly at this point of time, we have no intentions of leading any lending rate cuts in anticipation of deposit rate cuts, at least as far as the base rate is concerned.