With the repo rate going up and the marginal standing facility (MSF) rate going down,bankers are being cautious about moving their lending and deposit rates in any direction.
I think there will be some change in rates. Which way and what,I think you will have to wait for the Alco (assets and liabilities committee) meetings to happen,” Arundhati Bhattacharya,chairperson,State Bank of India (SBI) said,adding that the bank’s Alco would meet over the next 24 hours.
On Tuesday,the RBI reduced the MSF rate by 25 bps to 8.75%,while raising the repo rate by the same quantum to 7.75%. Bankers say the reduction in the MSF rate will bring down their cost of funds. However,the second half of the year is usually a time of tight liquidity and higher demand,which would also be a key deciding factor when it comes to rates.
Cost of funds over the last three months would have gone up. As we are now going back to the normal monetary policy,over a period of time,it would come down, said Aditya Puri,managing director & chief executive officer,HDFC Bank.
According to KR Kamath,chairman and managing director,Punjab National Bank,the central bank has cautioned lenders that for better liquidity management,they would have to raise more deposits.
There is also a feeling that what returns they are giving to depositors are negative if you factor in the inflation impact. Unless you make your deposits attractive,the funds may not come into the banking system; they will find their way into alternative channels where returns are better, Kamath said,adding that it was essential to offer better rates to depositors.
In its Macroeconomic and Monetary Development report on Monday,RBI had pointed out that deposit and lending rates in the system have gone up during the July-September period,owing to the liquidity control measures it had announced early July.
The increase in MSF rate had resulted in an increase of 20 bps q-o-q in the cost of borrowing during the July-September period,RBI said in its report. This rise was mainly with respect to short-term maturities of up to 180 days,reflecting the tightening of liquidity conditions.
While base rates for most banks remained the same,the weighted average lending rate on fresh rupee loans sanctioned by banks went up sharply by 42 bps between June and August,to 12.04%.
RBI had first increased the MSF rate to 10.25%,while curbing bank borrowing through the liquidity adjustment facility (LAF) to 0.5% of each bank’s net time and demand liabilities (NDTL).
The rate actions had resulted in a dramatic increase in the short-term rates,making it too expensive for corporate borrowers to access the commercial paper (CP) and certificate of deposit (CD) markets. This meant that borrowers moved to the bank loan market,improving the credit growth significantly.
According to RBI data,for the fortnight ended October 4,non-food credit for scheduled banks continued to grow at an impressive 17.9% year-on-year to R55,67,645 crore. Credit growth has gone from 16% y-o-y in early August to 18% y-o-y as per the most recently available credit data.
“With the short end of markets and the MSF rate correcting,there would actually be some movement back to the CP markets. My view is that credit growth for the year will be in the 15-16% range and the deposit growth will be around 14%, said Chanda Kochhar,MD & CEO,ICICI Bank.
While the issue of rising bad loans and high level of restructuring was not formally mentioned in the monetary policy,bankers said the issue was discussed at a meeting with the governor who indicated that they would look at ways to help bring economically viable projects back on stream.