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Loan rates to come down, but only after returns on deposits

April’s here, and you can look forward to paying lower instalments on your loans. But first, brace yourself for lower interest rates on fresh deposits that you are planning to make.

business Updated: Apr 01, 2015 02:13 IST
Mahua Venkatesh

April’s here, and you can look forward to paying lower instalments on your loans. But first, brace yourself for lower interest rates on fresh deposits that you are planning to make.

Sources said banks are looking at ways to bring down interest rates after their financial year (2014-15) closing on Tuesday. “Banks will look at reducing interest rates on loans, but to do so, they need to first bring down their deposit rates. Lenders are likely to take a call on these issues after their closing on March 31,” a finance ministry official said on the condition of anonymity.

On Monday, private sector lenders ICICI Bank and HDFC Bank reduced rates by up to 0.25 percentage points on high-value fixed deposits on select maturities, a move that is being seen as a precursor to lower lending rates.

“Banks are likely to take a call on interest rates — on both deposits and loans — after April 1,” confirmed Indian Banks Association chairman TM Bhasin.

Several banks have indicated they will take a call after the Reserve Bank of India (RBI) reviews the monetary policy on April 7.

While finance minister Arun Jaitley — who favours such a development — said that the government will not pressurise banks to bring down interest rates, he expressed hope that they will arrive at a decision soon.

RBI has reduced the repo rate — the rate at which banks borrow from it — by 0.50 percentage points in two tranches during the January-March quarter. Only Union Bank of India and United Bank of India have passed on the benefits to customers.

Due to the high interest rates, growth in borrowing was a tepid 10% in 2014-15. With a low loan outflow, banks were flush with funds and not borrowing much from the central bank.

“Lower repo rates will immediately lead to lowering loan rates when banks are primarily dependent on RBI for liquidity; but that is not the case currently,” the official said.