India rate cut alone seen unlikely to spur cheaper loans

MUMBAI: A rate cut by the Indian central bank next week will not be enough to spur banks to lower lending rates immediately, bankers said on Monday.

Instead, Indian banks, saddled with high-cost, long-term deposits and narrowing profit margins, are hoping for a cut in the cash reserve ratio, which would boost liquidity and in turn lower the cost of funds, and would allow them to ease deposit and lending rates.

The central bank, the Reserve Bank of India (RBI), last cut rates on April 17 by a sharper-than-expected 50 basis points, bringing the repo rate to 8 percent.

But most banks have been unwilling to follow the RBI, minimising the stimulative impact of the policy move as tight liquidity kept the cost of funds high for banks.

High lending rates in Asia's third-largest economy, coupled with rising inflation and sluggish decision-making on reforms, have stunted growth, which fell to a nine-year low of 5.3 percent in the March quarter.

"If CRR is cut our costs of funds will come down immediately so we'll be able to pass on the benefit to our customers," said B.A. Prabhakar, chairman and managing director of state-run Andhra Bank.

"Otherwise we'll have to lower our deposit rates. But in the meanwhile there won't be a lending rate cut," he said.

If the policy interest rate alone is lowered, then a cut in lending rates will be delayed by two to three months, several bank executives said. If a rate cut is accompanied by a CRR cut, the impact would be immediate.

New lending by banks slowed to just 29 percent of fresh deposits at end of May, much weaker than the 70 percent at mid-December, as demand for fresh credit has evaporated although tight liquidity has not allowed banks to lower deposit rates.

The three-month certificate of deposit rate for companies, also known as the wholesale rate, touched a high of 11.50 percent on March 13, and has remained near 9.5-10 percent despite the RBI's steep April rate cut.

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