Banks are bracing for further lending rate cuts as they lower their deposit rates though are wary of government’s attempts to compel them to lend in a situation where the risks are very high.
The Reserve Bank of India announced key rate cuts on Thursday, lowering the signal repo rate by 1 percentage point and also cutting the share of deposits that banks must hold in cash to free up more money for lending.
All banks are unanimous that interest rates would continue to fall, after the recent sharp cuts, but feel demand for credit would also be dependent on the business and consumer confidence.
“Interest rates would fall and would certainly be of great help to firms and individuals, but there is no guarantee that the fiscal stimulus packages would lead to increase in demand for credit,” said the chairman of a public sector bank.
“Concerns over rising credit risk together with the slowing of economic activity appear to have moderated credit growth,” the RBI said. Year-on-year credit growth has fallen to 24.5 per cent as on December 19, 2008 from close to 28 per cent a couple of months ago.
MD Mallya, chairman of Bank of Baroda, said his bank would review lending and deposit rates over the next 7-10 days and forecast credit growth for the banking sector a whole to moderate to 23-24 per cent in 2008-09.
The RBI has also advised banks to monitor their loan portfolios and take early action, including debt restructuring where needed to prevent a rise in loans that do not yield interest payments.