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Banks may reduce deposit rates

Several public sector banks have informed the government that they would soon cut peak deposit rates to maintain their margins.

Apnaloan.com Research Bureau

17 Oct 2007

Several public sector banks have informed the government that they would soon cut peak deposit rates to maintain their margins. Banks have recently slashed lending rates by 50-100 basis points (bps).


While public sector banks are free to set lending and deposit rates, they have decided to clear them with Lok Sabha in the wake of the often sharp differences between the finance ministry and Reserve Bank of India on interest rates.

 
Finance ministry officials confirmed that nationalised banks were likely to cut deposit rates shortly. Public sector banks had increased their deposit rates by over 150 bps in the last couple of years to combat the erosion of deposits as funds migrated to share markets through mutual funds.


Currently there is massive liquidity in the system and banks are realigning their rates to market realities. Even banks think a cut in deposit rates would enable them to pare lending rates and thereby meet credit growth targets since there is massive liquidity in the system.


Few banks also said to the media that lending rates in select retail loans have witnessed a downward correction but corporate lending remained at 9-12%. There is a case for a reduction in corporate lending and for that deposit rates should be lowered.


Several bankers feel the current deposit rates are very high and that banks should follow SBI and ICICI Bank who have lowered select deposit rates by 25-50 bps.