In­dia's home loans, de­posit rates set to de­cline from April 1 on re­vi­sion

The Pak Banker - - 6BUSINESS -

In­dian Banks are likely to an­nounce re­vised in­ter­est rates, start­ing April 1, which will lower the amount one earns on de­posits and make home and car loans cheaper.

"There is a pos­si­bil­ity that in­ter­est rates will be re­vised as the new loan pric­ing norms kicks in from April 1. In ad­di­tion, the cut in small sav­ings rate by govern­ment will bring down the bank de­posit rate," a chief ex­ec­u­tive of a large pub­lic sec­tor len­der told The Hindu, adding that he banks' as­set li­a­bil­ity com­mit­tee (ALCO) will meet this week to re­view rates.

A top of­fi­cial from an­other pub­lic sec­tor bank said, lenders may wait till the mon­e­tary pol­icy re­view, due on 5 April, to take a call on rates. The mar- ket ex­pects the Re­serve Bank of In­dia (RBI) to cut in­ter­est rate by at least 25 bps. A long stand­ing de­mand by the banks has fi­nally been met by the govern­ment which low­ered the in­ter­est rate of small sav­ings scheme last Fri­day. The in­ter­est re­duc­tion is var­i­ous schemes was any­where be­tween 60 and 130 bps.

Banks have been stat­ing that due to com­pe­ti­tion from small sav­ings scheme they were not able to re­duce their de­posit rate fur­ther. As a re­sult, the cost of funds were not com­ing down and hence lend­ing rates could not be low­ered. "We wel­come Govern­ment's de­ci­sion, as SBI has been ar­gu­ing for long-time that the trans­mis­sion of mon­e­tary pol­icy eas­ing has not hap­pened due to high small sav­ings rates," said Soumya Kanti Ghosh, Chief Eco­nomic Ad­viser, SBI. The Re­serve Bank of In­dia has been prod­ding banks to cut lend­ing rates in line with the re­duc­tion in pol­icy in­ter­est rate.

While RBI has re­duced repo rate by 125 bps since Jan­uary 2015, which now stands at 6.75 per cent , banks' lend­ing rate re­duc­tion was only 70 bps.

"RBI has re­duced rates by 125 bps to a four-and-a-half-year low of 6.75 per cent while banks have trans­mit­ted up to 70 bps in their base rate. This is be­cause high rates on small sav­ings schemes make banks' fixed de­posits un­com­pet­i­tive and in turn do not al­low banks to re­duce the cost of funds," Mr. Ghosh said. The cut in small sav­ings rate now gives more room to banks to re­duce their de­posit rates.

For ex­am­ple, the rate for one-year term de­posit un­der the small sav­ings scheme was re­duced to 7.1 per cent from 8.4 per cent. The State Bank of In­dia's one-year de­posit rate of­fers 7.25 per cent (1 year to 455 days ten­ure). The re­vised small sav­ings rates will be ef­fec­tive from April 1.

Clearly as banks re­duce de­posit rates, the cost of funds - a key com­po­nent that goes into the pric­ing of loans - will come down.

The other rea­son why lend­ing rates will come down is be­cause banks will shift to Marginal Cost of Funds based Lend­ing Rate (MCLR) from 1 April, as di­rected by RBI. This new regime of loan pric­ing will re­place the ex­ist­ing regime of Base Rate. In the base rate regime, most banks con­sid­ered av­er­age cost of funds while cal­cu­lat­ing the bench­mark lend­ing rate or the Base rate.

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