The Reserve Bank of India's annual credit policy for 2013-14 may not bring cheers for you. Clearly, banks are in no mood to reduce interest rates anytime soon following a cut in the policy/repo rate by 25 basis points to 7.25 percent. Hence, there will be no easing for your home or auto loan EMIs.
However, a fall in cost of funds will only trigger interest reduction among banks in future. Thus, the benefit of policy rate cut or policy transmission as it is known in banking parlance, would be passed on with a lag. Repo is the rate at which banks borrow money from the central bank.
"There is no scope for rate cut," Pratip Chaudhuri, Chairman State Bank of India (SBI) told reporters after the policy meet.
"Individual banks have to position themselves on sectoral credit growth based on their requirements and standing in the competition. Our home and auto loans continue to be strong. On corporate side, it is not much. Till we don't have much deployments on corporates, there is no such compulsion to cut rates."
SBI boss has been advocating for a 100 bps cut in cash reserve ratio (CRR) or the portion of deposits banks need to keep with RBI. According to Chaudhuri, a CRR cut would have resulted in significant interest rate cuts making the transmission very prompt.
Currently, SBI borrows around Rs 20,000 crore from RBI's repo window at 7.50 percent. A 25 bps reduction will save Rs 50 crore interest cost for the lender. SBI has around Rs 6 lakh crore loans linked with its base rate at 9.70 percent.
"If we distribute the tiny benefit among our borrowers, it would be only 1 bps advantage for them. There is nothing to transmit," Chaudhuri added.
CRR currently stands at 4 percent. This means, banks have to maintain balance equivalent to 4 percent of their deposits fortnightly basis. Banks normally do not earn interest on such regulatory obligation.
In 2012-13 RBI slashed CRR by 75 bps on top of a 125 bps cut in the CRR in Q4 of 2011-12. Since January 2012, it injected Rs 1.3 lakh crore of primary liquidity into the system through reductions in CRR. RBI had also conducted through an open market operations (OMOs) or buying of government securities totaling Rs 1.5 lakh crore to ease tight liquidity situation.
"Deposits growth rate is not encouraging. It is not possible that deposit rates will not come down in a hurry. Lending rates will really depend on cost of funds. Banks will see how cost of funds move (before cutting lending rates). We should not link lending rate movement to just an announcement of policy rate," Chanda Kochhar, managing director at ICICI Bank said adding that one rate cut does not mean that bank lending rates will fall overnight.
Also read: RBI sets measures to revive banks' priority lending
RBI projected deposit growth at 14 percent and loan growth at 15 percent in FY14. During 2012-13, banks fell short of attaining year-on-year credit and deposit growth projections by RBI. Those were at the same level.
The real problem is that people are mostly not parking funds on different deposit schemes. While the high rate of inflation has eroded their savings, the attractive investment returns in equities, post office and other government schemes have also dwarfed interest in term/saving deposits.
Also read: Banks not carrying out customer due diligence: RBI
Under this scenario if banks reduce their rate of interests, deposit schemes will shed further attractiveness. And, banks cannot cut lending rates alone as it will hit their net interest margin or the difference between interests earned and paid out.
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