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Banks set to cut base rates next month

Poor credit growth, competitive debt market rates, excess liquidity is forcing banks to reduce rates; seventh monetary policy on April 7 to set tone for the quantum of reductions

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Get ready for lower interest rates as banks are likely to bring down base rates from April, the beginning of the first quarter of the new financial year (2015-16).

With even the fourth quarter, which ends today, not seeing any major offtake for credit, bankers will have no option but to bring down their lending rates in April, which is the most lean month for credit, industry experts said.

A senior official at State Bank of India, said, "We may bring down the rates, but so far no decision has been taken. The bank may wait to see the actions and the tone of the seventh bi-monthly monetary policy which will be unveiled on April 7 before deciding on the quantum of the reductions."

Even Arundhati Bhattacharya, chairman, SBI, was non-committal.

She told dna last week, "Cannot say anything now. Will take a call in due course."

But bankers in the industry say that SBI has always retained the lowest rate and now that many of the banks are at the SBI base rate of 10% so it is only reasonable to expect that SBI will cut its base rate by at least 10 to 25 basis points further to stay competitive.

SBI, which controls about 15% of bank credit in the country, generally sets the trend both in lending and deposit rates with the lowest lending rates.

Another factor that will prompt banks is the excess liquidity they have invested in government securities is to the tune of over Rs 6 lakh crore.

The only worry for banks is their inability to garner deposits at lower rates, with government deposits offering attractive rates of interest. Deposits under various government savings schemes like Public Provident Fund (PPF) are at 8.7%, 10-year National Savings Certificate (NSC) at 8.5%, and Kisan Vikas Patra at 8.7%.

Even the March quarter did not see a huge surge in credit growth, with average credit growth struggling at 10.2% until March 6, according to the latest data released by RBI, lower than the 14 % reported by banks in the same time last year.

The very idea of RBI cutting the repo rate, or the rate at which it lends overnight money to commercial banks, by a total of 50 basis points in two tranches – first one on January 15, 2015, followed by a second one on March 4 – is to make credit cheaper for both for industry and the retail customers.

On February 3 when RBI unveiled its sixth monetary policy it cut the statutory liquidity ratio by 50 basis points to 21.5%. This meant that banks need to invest only 21.5% of their deposits in government bonds as a regulatory requirement. However, the poor credit growth has forced banking system to hold about 24 to 28 % of excess SLR.

Union Bank of India and United Bank of India were the only banks which have responded to the RBI rate cuts by cutting their base rate by 25 basis points in January 2015 after RBI effected its first repo rate cut of 25 basis points

Many banks like SBI, ICICI Bank, HDFC Bank, Bank of Baroda, Punjab National Bank, IDBI Bank, Dena Bank have not changed their base rate since 2013. With money market rates at lower at 7.78%, banks are also facing stiff competition from the money markets – another reason for banks to reduce rates. SBI, Union Bank of India and ICICI Bank have their base rates at 10% while BoB, PNB IDBI Bank and Dena Bank have pegged their base rates at 10.25 % while Axis Bank has its base rate at 10.15%.

Most smaller banks whom dna spoke to, including Andhra Bank, Indian Overseas Bank and Corporation Bank, said if our competitors bring down the rates we will have no option but to cut the rates.

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