Banks to slash interest rates; home loans to go down

Due to the huge amount of cash that has been deposited post demonetisation and the constant nudging by the government, banks are poised to slash interest rates in the next few days. This move comes along as the banks are moving in lockstep with the administration to lift the spirits of borrowers that has been lowered down by demonetisation and the 50 days sought by Prime Minister Narendra Modi come to an end.

Bankers also feel that the reduction in lending rates could be accompanied by a steeper cut in deposit rates. Large commercial banks currently pay about 7% for one-year deposits and charge 8.90% for loans of the same tenor. A senior bank official said the government has sought to persuade banks to lower rates on the grounds that the cost of deposits had dropped due to demonetisation and the benefits should be passed on to customers to boost consumption.

"Investment sentiments are low and the government is under tremendous pressure from the Opposition to showcase that the demonetisation exercise has paid off. Secondly, the common man is hoping that after going through agony for 50 da ys, he should gthe benefits of demonetisation. Therefore, the government is in dialogue with banks on measures that can be taken to boost investments," a senior bank official, told ET.

Modi announced that Rs 500 and Rs 1,000 notes would cease to be legal tender on November 8, in effect cancelling about 86% of the currency in circulation as part of his government's campaign against black money. He had said the situation would return to normal in 50 days.

Large banks are scheduled to hold meetings of their asset-liability committees, which decide interest rates on loans and deposits, on Friday and Saturday . In the past, banks have lowered lending rates, or the marginal cost of lending rates (MCLR), by increments of 5 and 10 basis points in the process of transmitting monetary policy cuts. A basis point is 0.01percentage point.

"Our sense is that a few lar ge banks will announce a steeper cut this weekend due to huge flow of deposits and poor credit demand," a bank chief who did not want to be named, referring to the deposits of demonetised notes, told ET.

Reserve Bank of India data show bank credit rose 1.2% to Rs 73 lakh crore in the fiscal year to date -April 1 to December 9 -much slower than the 6.2% rise to Rs 69.6 lakh crore in same period a year ago. Deposits rose 13.6% to Rs 105.9 lakh crore compared with a 7% rise to Rs 91.8 lakh crore in the year earlier.

The chiefs of large commercial banks will also meet on Friday -the deadline for depositing Rs 500 and Rs 1,000 notes in banks -to discuss other measures that can be taken to boost investment including possible infrastructure loan plans besides rate reduction.