Bankers in dilemma on cutting loan rates

Public sector banks are wary of cutting deposit rates in a pre-election mood as savers may be put off. But this is hampering any move to reduce lending rates, though there is pressure to make loans cheaper after benchmark inflation slipped below 1 per cent this week.

Public sector banks are wary of cutting deposit rates in a pre-election mood as savers may be put off. But this is hampering any move to reduce lending rates, though there is pressure to make loans cheaper after benchmark inflation slipped below 1 per cent this week.

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The benchmark prime lending rate is now around 12 per cent. An official source said that the new government would be under pressure to bring down tax rates, a move that would enable consumers to have more cash in hand, thereby boosting demand for credit.

Bankers said they must weigh the pros and cons because maintaining deposit rates at the same level while cutting PLR would be infeasible. Banks, which have a PLR of about 12 per cent, are already offering home loans at a much lower rate.

A senior government official said that banks are willing to lend but the overall demand is still low primarily on account of an uncertain job market. “We are yet to see demand for credit picking up and just a mere reduction in interest rates would not help,” the official said.

Mahesh Purohit, director, Foundation for Public Economics and Policy Research, told Hindustan Times that interest rates in the next couple of months are likely to remain stable. “It would be difficult for banks to immediately cut interest rates even as inflation touched a sub one per cent level as deposit rates may not be tampered with at this juncture,” he said.

Allen CA Pereira, chairman and managing director, Bank of Maharashtra said that banks would have to maintain a healthy balance between deposit and credit rates.