NEW DELHI: Deposit rates are expected to be revised downwards to
absorb cost of the hike in cash reserve ratio (CRR), bankers said on
Thursday. With credit growth slowing down, they said lending rates
will not be raised in the short term. Finance minister P Chidambaram
said on Thursday he does not expect interest rates to go up following
RBI move to hike mandatory deposits of banks by 0.25% to 8.25%.
In a meeting with CEOs of public sector banks, he asked the banks to
review their derivative portfolios and make sure customers understand
them fully.
Briefing reporters, Mr Chidambaram said, "They do not expect the CRR
hike to impact interest rates. So, going forward, in the reasonable
future, I do not expect an increase in interest rates by PSU banks.
By and large, banks are happy that only CRR has been hiked. No
increase in interest rates is expected by banks." Bankers felt the
lending rates will not be raised since the hike in CRR is construed as
a signal for liquidity management and not for hardening interest
rates.
"The increase in CRR by 75 basis points over the past two weeks will
have to be offset since margins are under pressure. It will at least
impact up to 10 basis points. Therefore, there may be a case to cut
cost of funds and review rates on the liabilities side to minimise
impact on the margins. However, the bank will decide eventually,"
Corporation Bank chairman B Sambamurthy said.
"The bank will take a view on rates in the next Assets & Liabilities
Committee meeting. Whether deposit rates should be reduced will depend
on deposit growth. Already, RBI has projected only a 17% growth in
deposits," Union Bank of India chairman M V Nair said.
According to RBI, deposits would increase 17%, or Rs 5,50,000 crore,
during 2008-09. Adjusted non-food credit is projected to increase by
20% during 2008-09. The finance minister said the RBI projections
could be conservative since bankers were of the view that both the
deposits and advances could grow more than the projections.
On derivatives, the minister said the banks must make sure the
customers understand the products. Several companies have filed legal
suits against banks over foreign exchange derivatives trades that have
gone bad. The RBI has constituted an inter-departmental group to
review the existing regulatory and supervisory framework for overseas
operations of banks, introduction of new products and processes,
increasing off-balance-sheet exposures including derivative products,
and recommend appropriate changes, including off-site reporting
systems.
The finance minister asked bank CEOs to increase their debt swap ratio
by replacing a bank loan with a money lender's loan. "I have said that
as per the June 18, 2004, debt swap scheme, banks must strive to
replace money lender loans by bank loans to farmers and extinguish the
money lender loan. While there is no target, next year we will capture
the data effectively."
He asked banks to beef up lending under differential rate of interest
(DRI) scheme priced at 4%. Although the government increased
eligibility limits under DRI, banks have not been lending under this
window, he said.
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