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Wednesday, October 31, 2012

Interest rates on loans unlikely to come down in a hurry

MUMBAI: Interest rates on loans are unlikely to come down any time soon with banks shying away from a cut after the Reserve Bank left key rates unchanged in its monetary policy review on Tuesday. The RBI left the repo rate, or the rate at which it lends to banks, unchanged at 8%, but reduced the cash reserve ratio (CRR), or the proportion of deposits banks must keep with it, by 25 basis points to 4.25%.

One basis point is equal to one hundredth of a percentage. The cut in CRR is expected to infuse Rs 17,500 crore into the financial system. The reverse repo, or the rate at which the central bankBSE -0.58 % absorbs excess liquidity through borrowings from banks, is unchanged at 7%.

"We will see no immediate impact on interest rates. However, rates could soften over the fiscal year," said Chanda Kochhar, managing director and CEO of ICICI BankBSE 0.20 %, which recently cut home loan interest rates by 25 bps-100 bps across maturities to boost demand.

"Deposit rates have been adjusting and wholesale deposit rates have been coming down," Kochhar added.

Pratip Chaudhuri, chairman of State Bank of IndiaBSE -0.24 %, said, "Our asset liability committee will assess the October net interest income. We have greatly benefited from the interest rate cut (in September). The bank is booking Rs 150 crore of incremental home loans every month."

SBIBSE -0.24 %, the country's largest bank, was the first lender to cut its base rate to 9.75% from 10% after the RBI in its policy review on September 17 effected a 25-bps cut in CRR to 4.5%. The bank's growth in loans has largely been due to the growth in retail loans, Chaudhuri said.

The central bank has also increased the provisioning on restructured assets to 2.75% from 2%, this could also limit the banks ability to cut interest rates. The banking sector would have to set aside capital of over Rs 3,000 crore to adhere to the new norms. "Provisioning, if it is required to be done in this quarter, will hit banks' net profit by 3%. I don't think we are in a position to earn this 3% by the CRR cut," said Punjab National BankBSE -0.49 % chairman KR Kamath.

Meanwhile, credit demand in the banking system continues to be muted. The growth in credit for the week ended October 5 stood at 15.9% while the growth in deposits for the same period was 13.9%.

Commercial banks including ICICI Bank, Axis BankBSE -0.40 % and HDFC BankBSE -0.03 % have been lowering deposit rates. "Deposit rates are just beginning to come off. The old deposits have yet to be re-priced. Hence, the translation into a possible rate cut will take sometime," said Shikha Sharma, managing director and CEO of Axis Bank. 
Source: The Economic Times, Oct 31, 2012

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