There's little room left for rate cuts: Bankers
By Neelima Shankar
Jul 13, 2009
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Bankers rule out scope for any ‘major' revisions in the interest rates over next few months.

Considering the deposit rates on small savings schemes, which have been left intact by the government, the bank deposit rates are not expected to fall further.

As reasoned by the bankers earlier, if deposit rates are adversely reduced, the retail holdings will be diverted into the small savings schemes, which offer interest at rate of 8 percent, besides tax-exemption benefits under Section 80 C of the Income Tax Act.

The government had reduced the interest rate on the small saving schemes by 100 basis points to 8 percent in 2003.

AC Mahajan, chairman and managing director, Canara Bank, said, "There is not much room left for interest rate reduction. We always wanted small savings rates to be in tune with market rates. However, with no change in small savings rates, it may be difficult for banks to pare deposit rates from current levels. We will, however, review the position in the next one or two months,"

Allen CA Pareira, chief of Bank of Maharashtra, maintains a similar view. He agreed that ‘banks would find it difficult to reduce lending rates further in the absence of deposit rate cuts. And, with no change in small-savings rates, there won't be much room left for deposit rate cuts.'

Consequently, lending rates, which are driven by deposit rates, are not expected to change. In fact, bankers feel lending rates may rise in fear future considering the expected increase in credit off take. The indications also come from increase in yields from government securities, with benchmark 10-year paper rising over 7 percent.

However, presently banks are struggling with ample liquidity - "We have seen good growth in retail deposits. So as long as the liquidity is good, there will be limited pressure on resource position," Mahajan added.

The net interest margin (NIM) of banks is presently between 2.5 percent and 3percent, with yield on advances and investments around 10 percent and 7.5 percent respectively and cost of deposits is around 6.5 percent.


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