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Banks see no point in cutting rates

BS Banking Bureau

Banks and financial institutions are likely to stick to their stand that they will not cut rates further at Wednesday's meeting with finance secretary Ajit Kumar. The latter has called a meeting of senior bankers and institution chiefs to take stock of the industrial slowdown and tardy credit offtake.

The meeting will be attended by CEOs of financial institutions and also chiefs of select banks including that of State Bank of India, Bank of Baroda, Bank of India, Canara Bank besides Indian Banks' Association chairman SS Kholi, who also heads Punjab National Bank.

"Tardy credit offtake is not the villain of the piece. It is a mere symptom. The real villain is the economic slowdown, on which banks do not have any control," said a senior banker. Banks are sitting on piles of liquidity and are parking funds in government securities and the overnight call money market as corporates refuse to lift bank funds.

"We cannot create an investment climate by merely slashing interest rates. It is up to the government to look into issues like speedy implementation of infrastructure projects, which can create the right atmosphere. Even at sub-prime rates, there are no takers for bank funds," pointed out a bank chairman.

State Bank of India and Bank of Baroda have pegged their short-term prime rate at 10.5 per cent. This rate is applicable to discounting of bills and letters of credit (LCs) etc, assets which are relatively safe and self-liquidating in nature.

However, even for these there are hardly any takers. Few bills come for discounting since trading activities are passing through a sluggish phase.

"We can cut the lending rates further if corporates give us some surety that they are ready to lift funds. When there is no demand for funds, what's the point in cutting the rates which are already at historic lows?," asked another banker.

With no deployment avenues, banks are parking funds at the 6.5 per cent repo window of the Reserve Bank, thereby booking losses as the average cost of funds is over 7 per cent. "We have our compulsions on protecting bottomlines. There is no way we can cut lending rates," said the banker.

In fiscal 2002 so far (between March 30 and May 25), the banking industry's credit portfolio has shrunk by Rs 99.8 billion, while the deposit liability has gone up by Rs 162.05 billion. Its investment in government securities ballooned by Rs 249.36 billion, more than one-and-a-half times the deposit growth.

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