After the Speech of Hon’able Prime Minister Narendra Modi on the New Year’s Eve, there has been a lot of action going on in the market, especially Banks. Major Banks like SBI, PNB, UBI etc have slashed their lending rates up to 60-90 basis points (bps). The market had seen it coming and was expecting the leading banks to slash their lending rates as New Year gifts.
Who slashed lending rates and by how much:
The country’s largest bank State Bank of India (SBI) declared a steep interest rate cut in several years on Sunday, by dropping its marginal cost of funds based lending rate (MCLR) by 90 bps across all maturities. With this cut, SBI has passed on advantage of 200 bps since January 2015 to customers, which is more than 175 bps decrease in the Reserve Bank of India’s (RBI) policy rate cut in the same period. The new rates are applied from today. SBI’s one-year MCLR stands reduced to 8% from 8.9%, while the rate on overnight loans is now 7.75%, against 8.65%.
n Sunday, two other public sector lenders – Punjab National Bank (PNB) and Union Bank of India – also cut their MCLR rates. PNB has cut its one-year MCLR rate by 0.7% to 8.45% from 9.15%, effective Sunday. Union Bank of India has reduced its MCLR by 0.65-0.9% to 8.65%. The revised one-year MCLR stands at 8.65%.
Housing Development Finance Corp, the largest home financier, and private lenders like ICICI Bank and HDFC Bank, which are more profitable than their competitors, will probably match SBI’s rates to ensure that they do not lose customers. IDBI Bank and State Bank of Travancore had led the field by trimming the rates on Friday evening itself. They have cut their MCLR by 15bps and 30bps respectively, and other banks are expected to follow suit.
Banks’ cost of funds has slipped as a result of the deposit influx. The Employees’ Provident Fund Organization cutting its interest rate to 8.65% from 8.8% in December was also an indication of loan costs coming down.
Advantages of Lending Rate Cut:
Slashed lending rates will give the consumption a much needed boost which had been slumped ever since Demonetization because people were unwilling to spend their cash on non-essential items in the wake of cash crunch. People considering home and car purchases were looking forward to cheaper rates due to the liquidity that’s flooded the banking system with the deposit of old notes, especially since corporate loan demand remains weak.
Some bankers believe that such a move could revitalize sentiment amid the dip in consumption due to the currency shortage stimulated by demonetization. SBI has pegged its lending rate at 8.90% for a year, among the lowest in the industry.
The fallen:
It is no mystery that the slashed lending rate might have some impact on the interest rates on deposits as well. Since the government on 8 November banned Rs500 and Rs1,000 currency notes, banks have received a flood of deposits—Rs12.44 trillion of deposits in old notes by 10 December, according to the last figure released by the Reserve Bank of India. As of 9 December, the deposit growth rate had widened to 15.9% year-on-year, while credit growth had slowed to 5.8%.
Deposit rates have been on a free fall since the start of RBI’s money-easing policy in January 2015. While this is not completely out of place, the speed has been the fastest in the last decade-and-a-half. Over the past two years, deposit rates have plunged 200-250 basis points, even as the RBI reduced its key policy repo rate by 175 basis points. In the past, such sharp fall in deposit rates happened only when the policy rate was reduced by 300-400 basis points.
The RBI’s neutral liquidity stance since April and the recent move to demonetize high-value notes have resulted in glut liquidity and led to deeper cuts in deposit rates this year. With banks likely to be flush with funds in the near term, deposit rates can trend down hitting historical lows. If the RBI had, as expected, cut rates in the latest policy, depositors would have felt more heat in the coming months.
After cutting the lending rates, Banks are now ready to revise their deposit rates yet again. As per the RBI data, credit slipped by 5.8%, on a year-on-year basis, till December 9, 2016, down from 10.6% a year ago. The credit offtake has been unenthusiastic after November 8, as the note ban has caused a shock in the economy. In case of deposit flows, the situation is exactly opposite of what happened in credit. Deposits have surged by 15.9% till December 9, up from 10.9% a year ago.
This clears a little fog from the future of deposit rates.
Impact of the Street:
Today, on the first day trade of the New Year, Bank Nifty went sliding in red. On 30th December 2016 Bank Nifty had closed at 18177.20 points and on 2nd January 2017, it opened at 18,242.30. By 9:30 AM, it had slipped to 18051.25. SBI share price was trading with the decline of almost 2 per cent at the time. Nifty share price itself took a little plunge and was trading at the decline of 0.32%. In all, the slashed lending rates will be beneficial for both the banks and customers in more than one way.
