Loans to get cheaper as RBI cuts key interest rates

Along with the rate cuts, the central bank also took steps, Saturday, to provide refinance facility of up to Rs.7000 crore to the Small Industries Development Bank of India (SIDBI) to promote funding for small industries and, in order to increase flow of funds to the ailing real estate sector, it gave the National Housing Bank (NHB) Rs.4000 crore refinance facility and encouraged the banks to lend to the housing sector by according "priority sector" status to housing loans up to Rs.20 lakh.

The apex bank also put a cap on the cost of some export credit to boost the export industry and allowed select banks to buyback foreign currency convertible bonds (FCCBs) from customers to "take advantage of current discounted rate at which these bonds are trading."

The RBI governor, after announcing the measures, said that he expected "that the banks will take a signal from the rate cuts" as the ongoing credit crisis has deprived companies and consumers of much needed funds. India's central bank has been easing monetary policy since October, joining global peers in pumping cash as credit markets freeze.

"The reduction in repo and reverse repo rate should result in a reduction in marginal cost of funds to banks and enable them to improve the flow of credit to productive sectors of the economy on viable terms," D. Subbarao said at a news conference on Saturday.

Responding to the central bank's call, several banks have already announced cut in their benchmark prime lending rates (BPLRs) while others promised to take similar steps within the next 4-5 days.

"The cut in repo and reverse repo would complement the stimulus package that the government might also announce. Through the cuts, the RBI is sending a message to banks that they must not only cut lending rates but also bring down their deposit rates," said Harihar Krishnamurthy, country treasurer at Development Credit Bank.

"Today's rate cuts indicate very strongly the RBI's concern to bring down interest rates. Liquidity is not an issue - it has been taken care of through the earlier measures," said Yogesh Agarwal, chairman and managing director, IDBI Bank.

Overnight call rates would definitely come down, he said, adding, "in a little while, both deposit and lending rates should also come down."

Public sector lender Dena Bank's chairman and managing director, P.L. Gairola, said that the RBI rate cuts were expected and that the apex bank "has sent a strong signal for interest rates to soften."

"It is a signal that money should become less costly. Deposit rates should decline in the coming days," he said.

India's second largest bank ICICI Bank said it would bring down home loan rates by 1.5 percent (from 13 percent to 11.5 percent) to revive the property market, which is on a downswing. The lender also promised to cut other loan rates.

Responding to the central bank's move, Yes Bank also reduced its prime lending rate by 0.50 percent.

"After our asset-liability committee meeting today, we have decided to reduce our PLR by 0.50 percent," said Rana Kapoor, managing director and CEO, Yes Bank.

The bank's PLR accordingly stands reduced to 16.5 percent from the earlier 17 percent.

Punjab National Bank's (PNB) chairman and managing director K.C. Chakrabarty said his bank has reduced lending rates. "We have reduced the BPLR as a proactive measure. We are committed to doing so on a continuous basis as and when we feel it is necessary and have the capability to do it," he said.

PNB has slashed its BPLR by 100 basis points to 12.5 percent effective 1 December. It will now stand reduced by another 50 basis points at 12 percent.

PNB has also cut its peak deposit rate to 9.5 percent from 10.5 percent for 1-2 years' fixed deposits.

"The recent RBI moves are extremely positive. Though a repo rate cut doesn't lower the cost of funds, we as end users, will stand to benefit as we expect the banks to reduce their lending rates," said Keki Mistry, managing director at Housing Development Finance Corporation (HDFC).

However, Chanda Kochhar, joint managing director of ICICI Bank said the latest rate cut is unlikely to spur banks to cut their lending rates by a wide margin, as their cost of funds is still high and loan demand remains robust. "The central bank move is a signal for the system rates to soften. But deposit rates need to adjust first," Kochhar said.

"There is adequate liquidity in the system now. But for interest rates to fall you need surplus liquidity," she added.

Fiscal stimulus is also needed to encourage banks to decrease their commercial lending rates, industry analysts said.

"For the economy to rev up we now need fiscal measures to focus on sector specific issues," said Shubhada Rao, chief economist at Yes Bank.

"Clearly, focus is now on growth and we can expect...fiscal support from the government," said Anubhuti Sahay, economist at Standard Chartered bank in Mumbai.

Agrees Indranil Pan, chief economist at Kotak Mahindra Bank in Mumbai. "Given the fact that growth is slowing down and inflation is coming off significantly, the monetary policy was needed to boost economic activity in an atmosphere of slowing external conditions," Pan said.

"However, the monetary policy needs to be supported by a push from the fiscal side also," he added.