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Banks set to cut deposit rates

Banks would reduce interest rates on deposits in the second half of this month to bring down cost of funds in order to enable a cut in lending rates, the country’s banking association said on Wednesday. Rate cut is likely after RBI announces its monetary policy on April 21.

india Updated: Apr 08, 2009 22:03 IST

Banks would reduce interest rates on deposits in the second half of this month to bring down cost of funds in order to enable a cut in lending rates, the country’s banking association said on Wednesday.

The reduction in deposit rates are likely after the Reserve Bank of India (RBI) announces its monetary policy for 2009-10 on April 21.

“More banks will drop deposit rates in the next fortnight to bring down the cost of funds and pass on the benefits of lower interest rates to borrowers as warranted by the monetary policy,” T S Narayanasami, chairman of the Indian Banks Association, said after bankers held a customary meeting ahead of the policy with RBI governor Duvvuri Subbarao.

The RBI, in an unusual move, has been in talks with banks to make them reduce interest rates in line with the easing of the monetary policy but banks are worried about the cost of the money they get in the form of deposits.

“We are trying our best to ensure transmission of policy rates to lending rates,” Subbarao said on Monday at a meeting organised by the Federation of Indian Chambers of Commerce and Industry (FICCI).

The RBI has cut its signal repo rate — the short term rate at which it lends to commercial banks — by 400 basis points (one basis point is one hundredth of one per cent) and cash reserve ratio (CRR), the proportion of deposits banks have to set aside as reserves, by 400 basis points since October 2008.

Banks, however, have reduced lending rates by only up to 150 basis points. They are flush with funds, but the question is now more over the rates than the quantum of funds available.

During the pre-policy meeting, bankers also conveyed to the central bank their concerns about the probability of a sharp rise in non-performing assets (NPAs) in the years ahead.

“As the economic slowdown prolongs, bankers fear that even the corporate loans which have been restructured could turn bad in the next one year or two,” the chief of a public sector bank who attended the meeting said on the condition of anonymity.

“It is in our own interest to bring down lending rates so that our asset portfolios do not get impaired. We are making every endeavour to see that cost of funds are bought down,” said Narayanasami, who is also the chairman of Bank of India.