Lending rate cuts may not become a reality anytime soon even if Reserve Bank of India slashes key policy rates in the forthcoming monetary policy review. Banks are hinting that because of mismatches in short term funding, which are said to at an all time high, they may not cut interest rates on advances even after reduction in policy rates. India Ratings, a ratings agency has said that that mismatches in asset - liability have been increasing for the last one year, and is at its peak for some banks.

Issues concerning refinancing have also peaked, especially for public sector banks as loans of longer tenures are sourced by short term deposits.      

On the matter, Mr. Anand Bhowmick, a senior director at India Ratings, has said that the risk is partly spread by a bank's domestic retail depositors, but the high speed of refinancing restricts the quarterly liquidity. It also raises the funding costs and ends the transmission of any policy rate reduction to the borrowers.

Mid 2013 has witnessed high gross non-performing loan ratios for the banks, which may become higher, but, is likely to come down following that. The cash flows from the corporate segment will also improve as a result of reducing commodity prices and as working capital cycles begin to contract.          

Meanwhile, even as corporate segments business is likely to be at a high level for some more time, asset quality ratios may not reduce much lower as they had peaked sharply since fiscal year 2011.