Expect more lending rate cuts in Feb

Public sector banks are expected to reduce their lending rates further next month.

"We have not asked banks to lower rates just yet. We are waiting for all of them to complete one round of cuts and we will then take up the issue. But the next round should be in February," said a senior government official.

At present, the benchmark prime lending rate of public sector banks ranges between 12 and 13.25 per cent (see table). Some banks, like Punjab National Bank, have cut the benchmark rate three times, and others, like State Bank of India, twice -- once in November and then earlier this month.

There are also lenders such as IDBI Bank that are yet to go for a second round of lending rate cuts, though deposit rates have been pared to lower cost of funds.

"For the smaller banks, the transmission of the lower deposit rates will take some time and that is what is delaying a reduction in lending rates," the official added.

"The overall direction is towards further cuts but the timing will depend on how much and by when we can lower the cost of deposits," said a public sector bank chief.

On Tuesday, United Bank of India cut its benchmark prime lending rate 50 basis points to 13 per cent with effect from January 12. Deposit rates have also been cut.

Over the next few weeks, banks are expected to lower deposit rates further with SBI, the country's largest bank, expected to review rates by the middle of the month.

In a report released on Monday, HDFC Bank economists said they expected deposit rates to fall 75 to 125 basis points by March, and lending rates 50 to 75 basis points.

To enhance credit flow and spur economic activity, the Reserve Bank of India has reduced the repo rate, the rate at which it lends to banks, 350 basis points since October. The cash reserve ratio, or the proportion of deposits banks must keep with the RBI, has been lowered 400 basis points in the same time-frame to infuse additional liquidity of Rs 3,00,000 crore and help banks earn some income. The reserve repo, the rate at which RBI absorbs liquidity from the banks, has also been lowered 200 basis points to discourage banks from parking surplus cash with the central bank.

For the moment, the finance ministry is concentrating on monitoring credit flow to various sectors. Yesterday, Finance Secretary Arun Ramanathan asked Mumbai-based public sector bank chiefs to step up lending and ensure that loan proposals were cleared quickly.

Public sector bank chiefs said credit flow is normal for segments like small and medium enterprises and firms. "Credit offtake is expected to pick up around January 15 because the effect of the series of rate cuts sets in and purchases coinciding with Makar Sankranti take place," said a bank chairman who was present at the meeting.