Base rate cut have to wait till next quarter

Only two banks - Union Bank of India and United Bank of India - took a cue from the Reserve Bank of India (RBI)’s repo rate cut and reduced their base rates.

RBI reduced the repo rate by 25 basis points (bps) to 7.75 per cent on January 15. The two banks also reduced their base rate by 25 bps each.

Base rate is the benchmark lending rate to which all loan rates are linked. 

Several banks, however, explored whether there was room for reduction in the base rate over the past fortnight in the asset liability committee. The answer was negative in all those reviews. 

“The cost of funds has not come down,” said a senior official from the State Bank of India (SBI). The country’s largest lender, which has reduced its deposit rate twice between September and December, found out the overall impact on cost of funds due to the deposit rate reduction was only marginal. 

“If you cut deposit rates, the rate only applies for new deposits. The re-priced deposits are only a fraction of our total deposit base,” the official added.

SBI’s deposit base, as on September 30, was close to Rs 15 lakh-crore, and consists of 16.8 per cent of the total market. 

While the cost of funds has not fallen to the extent that could translate into a lending rate cut, the rise in yield on advances has further acted as a hindrance for a lending rate reduction.

For example, Bank of Baroda (BoB) and Union Bank of India, the two large lenders that have announced their October-December quarter earnings, reported a decline in yield on advances sequentially. 

While BoB’s domestic yield on advances dropped to 11.01 per cent in Q3, against 11.17 per cent in Q2, for Union Bank of India, the fall in domestic yield on funds was 13 bps to 9.21 per cent. 

Both the banks have reported a fall in net interest margin (NIM) on a sequential basis in Q3. For BoB, NIM was 10 bps lower at 2.92 per cent, while for Union Bank of India, the fall was by three bps to 2.5 per cent.

A report from Bank of America Merrill Lynch said NIM of more than three per cent gives scope for banks to cut lending rates. “Our bank analysts estimate 75 bps of deposit rate cuts will neutralise the NIM impact of 50 bps of lending rate cuts,” the report said. 

Bankers said a base rate cut now would further squeeze their margins, at a time when credit growth is lowest in many years.

As on January 9, bank loan growth on a year-on-year basis was 10.7 per cent, compared with 14.5 per cent in the corresponding period last year, which is lowest in more than 15 years, according to latest data released by RBI.

In the current financial year so far, loan growth was 6.6 per cent, against 9.7 per cent during the corresponding period last year. Bankers are looking at the grim possibility of single-digit growth in the current financial year. 

“Where is the question of a base rate cut? You cut price, when there is demand, so that increase in volume offsets the loss in margin. That is not the case now,” said the chief executive of a state-run bank.