Banks may not cut lending rates soon

Banks in the country may not be able to cut lending rates soon in response to the 25 basis point reduction in the policy repo rate by the Reserve Bank of India (RBI) in its monetary policy review on Mach 19.

Banks may not be able to reduce lending rate because doing so would reduce their net interest margin when deposit rate is high. Banks cannot reduce deposit rate at a time when they are trying to attract more deposit.

Some reports indicate that the entire banking industry is bearing the burden of high cost bulk deposits.
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 interest rate for those deposits. This in turn erodes the net interest margin or the difference between interests earned and paid out.

Also, the tight liquidity condition prevailing in the banking system may dissuade banks from reducing lending rate. In recent days, banks on an average have been borrowing more than Rs 1 lakh crore daily from RBI Liquidity Adjustment Facility (LAF), an indication of tightness in the liquidity condition.

The banks’ borrowing amount from LAF is much above RBI’s comfort zone of around Rs 60,000 crore or 1 percent of net demand and time liabilities. Since last one year, RBI has cut repo rate by 100 bps and CRR by 50 bps.