‘Banks should be able to cut deposit, lending rates now’

After the government slashed small savings and PPF rates, are banks all set to cut lending rates now? Speaking to Bloomberg TV India, UCO Bank CEO and Managing Director Ravi Krishan Takkar says the reduction in small savings rate and implementation of marginal cost of lending rules from April, banks will reduce lending rates. While a 25-bps rate-cut has been factored in, the RBI Governor will have to watch the monsoon scenario to deliver a 50-bps cut, he said.

Do you think the reduction in small savings and PPF rates was long outstanding? Is this really the precursor to deposit as well as lending rate-cuts by the banking system?

Yes. Bankers have been asking for reduction in the interest rates on the small savings because no doubt they constitute a big chunk of the total savings in the economy. But for small savers, it makes a lot of difference. This reduction in the small savings interest rate was wanted by the system. And I really feel it is a good step because this should help the banks in also reducing their lending rates. The banks have in the past reduced the deposit rate whenever RBI has cut policy rates. But at the time, bank deposit rates became very uncompetitive. Now the banks would also get the benefits of the time lag that is almost more than a year and the rates have started declining. And with the marginal cost-based lending rate rule coming into effect from April 2016, banks would be in a much better position to pass on the benefits to the borrowers in the coming future.

With the marginal cost of funding kicking in from April and government bond yields already down to 7.5 per cent, the board money market rates are down without the RBI moving to cut rates. Given the equation right now, how much can lending rates come down in the first quarter of the fiscal year?

It is difficult to say how much lending rates will come down. The individual banks’ asset liability committees would be taking a call on that. But seeing the current scenario, I think 25 basis point deduction should be there.

Minister of State for Finance Jayant Sinha is saying that possibly the public should have been consulted as far as the small savings rate cut is concerned. There has been some concern on this issue; a lot of commentary has been made and now the government on its part is admitting that possibly they could have done it differently. Do you think it could have been done differently?

I think the step taken by the government is in the right direction and they don’t really have to change that. The market required this and if we have to go to a low interest rate scenario, I think this was required and is certainly in the right direction for the public.

Deposit rates have come down a lot faster than lending rates. As a result there has been pressure across the board as well. How do margins work now, with the bond yields and the cost of funding coming down in the market? Surprisingly, the deposit rate growth has actually come down a bit, which is very odd in this market.

The deposits rates, no doubt, have been coming down. And if you really see the recent trends, margins are under stress too. As banks reduced the deposit rates in the past one year, the effect will be visible now because of the time lag. And once that effect kicks in, I think banks will have some cushion to reduce the lending rates. The deposit rates have come down substantially and are now at a quite reasonable level, compared with small savings rate. It will depend again on the market forces and the banks will take a call on how the markets will move. So we can see a small movement in the deposit rates.

Given the state of the economy, the new asset quality review and the marginal cost of funding rules kicking in from April, are bankers ready for the new lending rate regime and what is the impact on the bank lending rate scenario?

No doubt, AQR and other things have put a lot of pressure on the balance sheets. But banks have to move to the new Basel-III regime. There is no second choice. But banks should be in a position to absorb the extra cost.

Is there a merit for RBI to cut rates by 50 bps? My personal opinion is that a 25-bps cut is acceptable. For a 50-bps rate cut, the RBI Governor will have to watch the monsoon scenario.

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