Bank's lending rate cuts raise hopes of a revival in credit growth

New Delhi: A bunch of banks have cut lending rates after State Bank of India’s (SBI’s) deepest loan rate slash in recent years, raising hopes of a credit growth revival after economic activity was disrupted by the withdrawal of high-value currency.

After SBI cut its marginal cost of funds-based lending rate (MCLR) by 90 basis points (bps) on Sunday, other lenders such as Punjab National Bank (PNB), Andhra Bank, Dena Bank, ICICI Bank Ltd and Kotak Mahindra Bank Ltd followed suit, cutting their MCLR by 45-75 bps.

MCLR is the benchmark for new loans. One bps is one-hundredth of a percentage point.

Banks are cutting rates by a high margin after the note ban led to a deposit surge, reducing their cost of funds, and Prime Minister Narendra Modi exhorted them to “keep the poor...at the focus of their activities” and act with the “public interest” in mind.

In his speech on 31 December, Modi also announced a range of credit sops for farmers, low-cost housing and small and medium enterprises. These are expected to boost credit growth, which is stagnating at 5.8% year-on-year, according to the latest Reserve Bank of India data.

“Loan growth targets for the current financial year will have to be revised. We started this year with a target of 11-12%. (Now) it is around 6.7-6.8%. With this rate cut we are hopeful that we will be able to take it up to 8-9%,” said SBI chairman Arundhati Bhattacharya.

Yet, some analysts wonder whether these rate cuts are a knee-jerk reaction to the dramatic fall in credit growth that will hurt the margins of banks. In a note to clients on Monday, Nomura Research termed SBI’s 90 bps cut “irrational” because the lender has cumulatively cut lending rates by 200 bps in two years compared with a 150 bps reduction in term deposit rates.

However, SBI’s Bhattacharya said that the impact on its net interest margins will only be in the range of 7-8 bps. For one, the bank has increased its spread over the MCLR from 20-60 bps.

“Today the money is being deployed in low-yielding assets like Gsecs and MSS, but in loans I will immediately get a pickup of 200 bps on margins,” she said.

Bhattacharya also pointed out that the net deposit growth during the 50 days of demonetization was about Rs1.65 trillion, greater than the Rs1.54 trillion deposits it had accumulated in the whole of fiscal 2016. She said that about 30-40% of these deposits would remain.

Other SBI officials are even more optimistic. A senior official in the bank’s treasury department said that it expects about 60% of deposits to stay with the bank—with most of them in low-cost savings and current accounts, the cost of these funds work out to less than 4%, he said, the implicit assumption being that the cash withdrawal will not be relaxed for a long time.

“With cost of funds coming down and FCNR redemption behind us, we will also look at cutting MCLR. We will take a call on 7 January. The cut in MCLR is irrespective of the time period for which these deposits will stay in the system,” said an official with Bank of Baroda.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.