The Reserve Bank has done a balancing act amid weak economic conditions by increasing liquidity that can help bankers cut lending rates,and at the same time let it continue with its nearly three-year-old fight against inflation,top lenders said today.
They hinted at a marginal reduction in lending rates following today’s cut in the Statutory Liquidity Ratio (SLR) – the amount of deposits that have to be invested in government bonds and other liquid assets.
RBI reduced the SLR by 1 per cent at the quarterly monetary policy review this morning.
The nation’s largest lender State Bank of India hinted at lowering lending rates to retail customers.
The one percentage point reduction in the SLR will release an additional Rs 10,000 crore for SBI. That coupled with Rs 6,500 crore released through the reduction in export refinance,may lead the bank to cut lending rates in retail, Chairman Pratip Chaudhuri said at the RBI headquarters.
It is always better to deploy money at 10.50 per cent return than the average of 7.5 per cent which the SLR gives,Chaudhuri said.
He further said the bank’s asset liability committee (Alco) will meet either today or tomorrow to take a call on both base rate as well as whether to cut spreads in select retail products.
RBI Governor Duvvuri Subbarao cut the SLR to 23 per cent,thereby releasing around Rs 68,000 crore of additional liquidity into the system,even as he left all the key interest rates unchanged in the anti-inflationary stance.
Accordingly,the repo or the short-term lending rates and the cash reserve ratio (CRR)- the portion of deposits that banks park with RBI without interest – at 8 per cent and 4.75 percent,respectively.
Banks already hold nearly 30 per cent of their deposits in SLR and it is unlikely that many will park out some portion of that fund in the given scenario where more and more borrowers are unable to service debts.
To further help the liquidity-starved corporates,the central bank has removed the provision for 50 per cent compulsory conversion of the forex earnings into rupee,
imposed in mid-May. Accordingly,companies can keep the full forex earnings with themselves.
The move was aimed at arresting the steep fall of the rupee. Reacting to the policy review,Bank of India head and IBA chairman Alok Misra said,”Considering the economic outlook,RBI has taken a balanced policy action by keeping CRR
and the repo rate unchanged.
We should acknowledge that Europe is in recession,growth is slipping in the US,global trade is weak,inflation expectation is high,the rupee is weak and the monsoons are sporadic. So,by reducing the SLR,RBI wants to ensure that
growth is not hampered.
Chanda Kochhar of ICICI Bank,which is the third largest lender after SBI and PNB,however,was non-committal on passing on the benefit to customers following the SLR reduction.
Though she admitted that the SLR reduction will make more liquidity available for lending to the productive sectors,she did not answer a query from reporters whether her bank will reduce the lending rates for retail borrowers.
On deposit rate cuts,SBI’s Chaudhuri said,it is very difficult to reduce short-term deposits immediately. However,there could be some space to cut rates on long-term deposits.