Retail deposit rates may rise
Banks might hold on to lending rates for the time being
( MY views given below)
With Consumer Price Index (CPI)-based inflation at 9.84 per cent in September (provisional data), the Reserve Bank of India (RBI)’s second quarter monetary policy review would provide cheer to investors in debt, primarily for three reasons: First, the RBI statement could goad banks to step up efforts to mobilise deposits. Second, it indicated inflation-indexation bonds linked to consumer inflation would be launched in November-December. And third, lending rates are unlikely to rise in a hurry.
“Going forward, however, the more durable strategy for mitigating mismatches between the supply of, and demand for, funds is for banks to step up efforts to mobilise deposits,” RBI’s policy statement said on Tuesday.
To attract deposits, banks would have to increase rates. While bankers are tight-lipped on the quantum of the rise, there is a consensus deposit rates might be increased soon. “The governor has asked banks to rely on deposits for funds. For that, we will have to work on getting more deposits into the system,” said K R Kamath, chairman and managing director of Punjab National Bank and chairman of Indian Banks’ Association.
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This would only be possible if banks give more real returns on deposits. “If you look at it, today, deposits give negative returns compared to inflation. But the deposit rates would be a function of each bank’s liquidity position,” Kamath added. More clarity on rates would emerge once banks’ asset-liability committees meet in a day or two.
A few banks have already scaled up rates. Last month, State Bank of India raised its retail term deposit rates (below Rs 1 crore) across tenures. For seven-179 day tenures, the rate was raised from 6.5 to 7.5 per cent a year, for 180-to 210 days from 6.5 to 6.8 per cent and for a year-10 years from 8.75 per cent to nine per cent. Similarly, Oriental Bank of Commerce raised its rates by 50 basis points to nine per cent for deposit tenures of two-three years; for tenures of more than three years, the rate was raised to 9.25 per cent. Lakshmi Vilas Bank increased rates on deposits in four maturity slabs by up to 50 basis points.
Lending rates could see some upward pressure, though this is likely to have a delayed impact. “Some change in lending rates is expected, but the quantum and the timing remains to be seen,” said Arundhati Bhattacharya, chairman and managing director of State Bank of India.
The rise in lending rates would also be a function of the liquidity situation. “Given the rise in repo rate has been compensated by a cut in the marginal standing facility (MSF), the review has doubled the limits of funds to be raised under seven-14-day repos; liquidity is tight in the third quarter of the financial year and the extent of impact on banks’ cost of funds remains to be seen,” said Chanda Kochhar, managing director and chief executive of ICICI Bank. Those planning to take the plunge by investing when the deposit rates rise should wait a while. Currently, fixed deposit rates are lower than CPI numbers. For instance, State Bank of India’s one-year rate of nine per cent is lower than the CPI, which is 9.84 per cent.
With the apex bank proposing to launch inflation-indexation bonds (linked to CPI) soon, it would be a good opportunity to earn higher returns. However, remember these bonds would have a 10-year tenure. Also, the returns would vary, depending on the CPI rate. On the other hand, a fixed deposit, as the name suggests, would earn fixed returns.
My Views are as follows"----
After much delay ,after making liquidity problem a critical
issue and after facing the problem for long , RBI has finally come out with
good suggestion. RBI Governor Mr. Rajan has rightly and correctly advised
bankers to solve their liquidity problems by mobilizing more and more deposits
and not depending fully on Repo Rate or MSF based solution offered by RBI to
mitigate liquidity problems.
During last few years banks complete forgot retail
depositors and retail loan seekers and they thought it easy to lend bulk loan
to big corporate to achieve target and similarly they achieved their deposit
target by buying high value deposits from government departments and cash rich
corporate houses. Due to this their wrong attitude, retail depositors shifted
their loyalty to private banks where ratio of CASA ( low cost deposit called as savings deposits and current deposits ) is now more than majority of Public
sector banks.
Similarly due to rise in high value wholesale advances, 200 top borrowers of any PSU bank constitutes their more than two third (i.e. more than 70%) of their advance portfolio. Even small farmers and small traders are denied loan and advised to seek loan from Micro Finance Institute who charge higher rate of interest.Banks think it wise to lend hundreds of crores of rupees to Micro Finance Institute than to lend directly to small farmers and traders.
Similarly due to rise in high value wholesale advances, 200 top borrowers of any PSU bank constitutes their more than two third (i.e. more than 70%) of their advance portfolio. Even small farmers and small traders are denied loan and advised to seek loan from Micro Finance Institute who charge higher rate of interest.Banks think it wise to lend hundreds of crores of rupees to Micro Finance Institute than to lend directly to small farmers and traders.
Altogether it may be said that PSU banks became the bank of
Rich people who can provide hundreds of crores of rupees as deposits and who can
avail loans to the tune of hundreds of crores of rupees. Banks were nationalized
for the benefit of poor and rural folks but gradually it turned into bank for riches.
This wrong and faulty attitude of bankers made their balance sheet miserable
and they were constrained to depend on the mercy of RBI to get higher rate on
CRR and to get fund from RBI on lower REPO rate.
I salute RBI Governor Mr. Rajan for his bold and right advice to bankers and I hope
banks in turn will try to offer higher interest to depositors. Poor and middle
class families whose survival depends on interest income will feel highly
relaxed and comfortable. Rich businessmen who will have to pay higher rate of
interest on loans will not face much discomfort because role of interest in
their balance sheet and in profitability is not as significant as other factors
of market use to be.
I am fully confident that if bankers really turn their
entire work force towards small depositors , they will be able to solve their
liquidity problem on permanent basis . Similarly if they focus on small lending
they will be able to reduce burden of bad assets and increase profit. Not only this, banks will also be able to mitigate risk arising out of concentration of credit and get rid of liquidity crisis.
When repayment from small borrowers comes in times , asset liability mismatch will not arise and on the contrary when high value loan goes bad it reduces the lending capacity of the bank and cause much erosion in profitability. Due to blockage of fund in few bad corporate houses banks could not increase turnover and increase their profitability.
When credit growth takes place in well distributed manner across the country in SME sector , not only profit earning capacity of each bank will rise , the overall GDP growth will also rise in well distributed manner.Besides,banks will not be required to make provision much for bad advances or not required to resort to illegal restructure of high value bad assets .Further When profit will rise they will pay higher increase in wages to their staff and higher value to respect to their work force, this will result in more work and more loyalty of work force towards their organization.
When repayment from small borrowers comes in times , asset liability mismatch will not arise and on the contrary when high value loan goes bad it reduces the lending capacity of the bank and cause much erosion in profitability. Due to blockage of fund in few bad corporate houses banks could not increase turnover and increase their profitability.
When credit growth takes place in well distributed manner across the country in SME sector , not only profit earning capacity of each bank will rise , the overall GDP growth will also rise in well distributed manner.Besides,banks will not be required to make provision much for bad advances or not required to resort to illegal restructure of high value bad assets .Further When profit will rise they will pay higher increase in wages to their staff and higher value to respect to their work force, this will result in more work and more loyalty of work force towards their organization.
I have been rather advocating since long that RBI should
come forward with uniform rate structure keeping in view the national
priorities so that inter bank competition among various public sector banks will
be reduced to zero. If any of PSU banks incurs loss it is direct loss of Indian
people and it is poor investors, depositors and innocent customers who suffer
due to wrong policies of banks and its regulators like RBI and Ministry of
Finance
Impact of Monetary Policy
The Reserve Bank of India (RBI) has now completed the process of re-aligning the interest rate corridor, bringing the MSF (Marginal Standing Facility) rate and the repo rate within the 100 bps spread. To this effect, in its second quarter review of the monetary policy, the central bank hiked the repo rate by 25 bps to 7.75 per cent and reduced the MSF rate by 25 bps to 8.75 per cent.
Measures to ease liquidity will allow commercial banks to borrow majority of their requirement at the repo rate instead of the MSF rate. This will allow for swifter transmission towards repo becoming the effective policy rate. Even though normal monetary operations have resumed, we do not expect commercial banks to lower the base lending rates (BLR) in the near term. The repo rate is still 50 bps higher than its lowest level in this fiscal so far – it was 7.25 per cent in May. The BLR had begun to decline prior to July; however the liquidity tightening measures in support of the rupee reversed this trend.
The central bank now expects WPI inflation to remain above the current levels (6.5 per cent in September) in the coming months, raising its inflation forecast for the entire fiscal above the earlier projection of 5.5 per cent. Hence, further repo rate hikes to tame inflation would not come as a surprise. At the same time however, it lowered the growth forecast for the fiscal to 5.0 per cent from 5.5 per cent earlier.
Loan off take to remain sluggish in 2013-14
Credit growth in the banking sector, which was subdued at 13-14 per cent till mid-July, has been steadily rising over the last three fortnights. Banking credit grew by 17.8 per cent, as of October 4, 2013 as the liquidity crunch, high short-term interest rates in the market and sharp rupee depreciation, pushed companies to borrow funds from banks as opposed to costlier money market sources. However, Such growth may not be sustainable till March 2014, amidst a sombre macro-economic outlook.
We expect a 13-14 per cent y-o-y growth in bank credit in 2013-14, lower than the 16 per cent growth witnessed in the previous fiscal. While investment demand would remain weak, drawdown of sanctioned limits, refinance of foreign borrowings with domestic debt, growth in agricultural
loans and certain retail loan segments, such as home loans, would support credit growth.
Deposit to grow by 14-15 per cent in 2013-14
Bank deposits grew by 14.8 per cent y-o-y, as of October 4, 2013, from 14.0 per cent, reported a year ago. This increase can be attributed to inflows in the short-term maturity segment (up to 180 days) where deposit rates were hiked by 50-100 bps, considering the tight liquidity situation in money markets. NRI deposits too have gained traction, given the attractive deposit rates on such instruments, coupled with a weak rupee. Bank deposits are forecast to grow at 14-15 per cent in 2013-14, a tad higher than that in 2012-13. Firm deposit rates, and volatility in returns from other asset classes, would support growth in bank deposits.
CD ratio to remain at historical highs
The credit deposit (CD) ratio of banks reached a historical high of 80.3 per cent in 2012-13. Slower accretion to deposits, as compared with growth in credit, has led to a gradual increase in CD ratio, over the past three years. We expect this trend to continue in the near term, as a result of which, the CD ratio will remain elevated even in 2013-14.
Lending rates to stay elevated; NIMs under pressure
Despite a marginal reduction in cost of borrowings, we expect lending rates to remain elevated, given the firm deposit rates and high CD ratio. High cost of funds, rising delinquencies and increased competition would keep net interest margins (NIMs) under pressure, especially for public sector banks. Average NIMs are thus expected to decline by 20-25 bps during 2013-14.
Source: Reserve Bank
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