Bankers planning cut in deposit, lending rates

NEW DELHI AUG. 26. Depositors are in for another cut in their earnings from bank deposits with most banks now deciding to reduce their lending rates further. The rush to reduce lending rates has been triggered off by the Reserve Bank of India's last Saturday move to cut the repo rate by 0.50 per cent, in line with the reduction in the Bank Rate announced earlier.

Major banks such as State Bank of India, Corporation Bank, UCO Bank, United Bank of India, Bank of Baroda and Bank of India are reportedly planning to reduce their lending rates that would invariably lead to a further reduction in deposit rates. Leading bankers have confirmed that they are planning to cut lending and deposit rates and a decision on this would be taken once they have worked out their "individual spreads,'' that is, their overheads and profitability.

For the individual depositors, the lowering of lending rates has been a "distressing'' phenomenon as returns from savings have been declining constantly in the last few years. Other avenues to park their savings have also dried up and it is just recently that the stock markets have again become a source of better returns on investments. But because of the unpredictability of the stock markets, a steady and assured return is not possible.

For the depositors, the real returns have been further eroded by inflation. While lending rates are being systematically lowered in line with international trends, the near 6 per cent inflation in the first quarter of the current fiscal translated into a real return of 2-3 per cent on deposits attracting 8-9 per cent interest. There was some respite for the depositors in recent weeks when the inflation fell to below 4 per cent, but a likely further cut in deposit rates would erode that benefit.

Economists point out that while the lending rates have come down from the high of 15-16 per cent some years ago, industry has still not benefited from the low cost funds mobilised by the banks. The average prime lending rate (PLR) of public sector banks continues to be in the range of 10.50-11.50 per cent, that is, the lending rate for the "bluest of the blue-chip companies.''

Other industries, especially the small and medium industries, still pay higher rates to the banks and this wide spread between the cost of funds and the ultimate lending rate has resulted in the significant profits for the banking industry. The high profits have also made banking shares the prime pick of stock market investors.

At present, the banking industry is reportedly having excess liquidity to the tune of Rs 50,000 crores and inducements such as lending rate cuts have not resulted in any notable surge in credit to industry. Economists term this as an investment famine, brought about by subdued demand conditions in the economy. Unless this demand picks up, lending rate cuts are unlikely to make any significant difference to credit offtake by industry, the economists point out.

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