The Hindu : Business : Banks likely to cut lending, deposit rates

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Banks likely to cut lending, deposit rates

Oommen A. Ninan

RBI urges banks to monitor their loan portfolio

Evidence of economic activity slowing down
Rs. 3 lakh crore made available to the financial system

MUMBAI: The Reserve Bank of India (RBI) on Friday reduced the repo and reverse repo rates by 100 basis points each from 6.5 per cent to 5.5 per cent and from 5 per cent to 4 per cent with immediate effect. It also reduced the Cash Reserve Ratio (CRR) of scheduled banks by 50 basis points from 5.5 per cent to 5 per cent from the fortnight beginning January 17, 2009.

The repo rate is the rate at which banks borrow from the RBI and reverse repo is the rate at which banks park their funds with the central bank. The CRR is a portion of the deposits of banks which has to be maintained by banks with the RBI.

The reduction in the CRR will inject an additional liquidity of around Rs. 20,000 crore to the financial system. “It is expected that the reduction in the policy interest rates and the CRR will further enable banks to provide credit for productive purposes at appropriate interest rates. The RBI, on its part, would continue to maintain a comfortable liquidity position in the system,” the RBI stated while announcing further monetary stimulus here.

These monetary measures are expected to be translated into further cuts in lending and deposit rates by banks. This means personal, housing and automobile loans would be cheaper further.

RBI’s caution

However, the RBI cautioned banks. “Even as some public sector and private sector banks have cut lending rates in response to the RBI’s monetary policy stance, concerns over rising credit risk together with the slowing of economic activity appear to have moderated credit growth. The RBI continues to urge banks to monitor their loan portfolio and take early action, including debt restructuring where warranted, to prevent the rise of bad assets down the road and safeguard the gains of the last several years in improving asset quality.”

At the same time, the RBI stated, banks should price risk appropriately and ensure that quality enterprises continue to get funding.

Since mid-September 2008, the RBI has reduced the repo rate from 9 per cent to 6.5 per cent, the reverse repo rate from 6 per cent to 5 per cent and the CRR from 9 per cent to 5.5 per cent. The cumulative amount of primary liquidity made available to the financial system through various measures initiated by the RBI’s is over Rs. 3,00,000 crore.

The RBI stated that there is evidence of economic activity slowing down. The services sector, which has been the main engine growth during the last several years, has also been slowing down. Business confidence has been dented significantly. “There are clear signs of deceleration in investment demand.”

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