BANKING
| Union Bank rate cut does not indicate a trend Tue, 03 Jan 2012 00:28:00 +0530 |
| Business Standard Industry may not be able to lower lending rates till deposit rates are high. The interest rate cycle may have peaked, but lending rates are likely to remain sticky. Last week, Union Bank of India announced a 10 basis point cut in its base rates, after it managed to re-price its wholesale deposits. With the bank passing the benefit to consumers, the market is abuzz with discussion on whether other banks will follow suit. Analysts say that while this directionally signals the peaking of the rate cycle, other banks are unlikely to follow suit. Edelweiss Financial Services says the Union Bank’s rate cut is in response to a five to six basis point benefit witnessed by the bank in December due to some downward re-pricing of high cost wholesale deposits. The bank expects further moderation in funding costs in the coming quarter. At present, 60 per cent of the bank’s loans are linked to base rate, which will now be re-priced lower by 10 bps. However, analysts believe that interest rates may take some more time to come off for other banks. For rates to actually come down, banks will need to start cutting deposit rates. However, this is unlikely as high NRE deposit rates will make it slightly difficult for banks to bring down lending rates in a hurry. Also, if large banks start increasing interest rates on savings bank accounts, it may become difficult for them to lower deposit rates. This would also impact lending rates. However, with loan demand falling faster than expected, economists believe that a rate cut by the Reserve Bank of India could be on its way. According to a Bank of America Merrill Lynch report, “Credit offtake has come off to 17 per cent on December 16 — actually our March target — from 21.2 per cent in March 2011. We expect the RBI to cut policy rates 100 basis points between March and July. Lending rates will likely come off by 150 basis points from April on with loan demand slowing.” |
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