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Most banks to stay put on lending rates despite SBI rate cut

Author: Debasis Mohapatra/Wednesday, January 3, 2018/Categories: Banking & Financial Services

Most banks to stay put on lending rates despite SBI rate cut

Mumbai: Despite a sharp reduction in base rate announced by the State Bank of India (SBI), most other banks in both public and private sector space are not likely to follow suit.

Analysts are of the opinion that systemic liquidity is drying up, which will restrict banks to reduce lending rates in the current scenario.

“We have to understand that SBI enjoys certain economies of scale. It has huge cheap cost deposit base, which has given the bank the leverage to reduce base rate by 30 basis points. As cost of funds for most banks remain high at this point of time, it is very unlikely that other banks will take similar action in line with SBI,” former treasury head of Union Bank of India, VJ Mhatre told The Finapolis.

He also said piling of bad debts in the banking system has already put pressure on net interest margin (NIM) of banks, which would come under further strain in case of a lending rate cut.

“Most banks can’t reduce their base rates now as spread is already under pressure,” Mhatre added.

On January 1, the country’s largest lender — the State Bank of India — slashed its base rate by 30 basis points to 8.65%. This cut will benefit around 80 lakh borrowers of the bank who had taken loans on floating rates before April 2016.

The public sector behemoth has also extended its home loan processing fees waiver plan till March 31, 2018.

With this move, SBI’s base rate has become the cheapest lending rate among all the lenders. According to industry experts, this step is also likely to put the concerns of the Reserve Bank of India over policy transmission to rest. In the last policy review in December, RBI governor Urijit Patel had reiterated that banks have scope to reduce borrowing costs further.

“SBI has the first mover advantage in this case as it has a large base of low cost deposits. But, unlike other instances where policy transmission by SBI is usually followed by other lenders, most banks are not likely to lower their lending rates,” Mhatre said. 

Meanwhile, economists are of the view that liquidity in the system is drying up, which provide less space for banks to tweak interest rates.

“Liquidity in the system is moving towards normal from surplus levels seen after demonetisation. Also, with inflation picking up, we believe that policy rate cut is all set for a prolonged pause,” Anubhuti Sahay, head of South Asia research at Standard Chartered Bank said.

She also said that 10-year benchmark bond yields have perked up to around 7.3% levels, indicating a tight money flow in the system.

In this perspective, it is difficult for banks to reduce lending and deposit rates in coming months.

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