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Lending rates seen to fall 3% in six months

Calcutta, Oct. 22: Banks might have to cut lending rates by as much as 3 per cent over the next six months if the soft interest rate regime continued, said P. S. Shenoy, chairman of Bank of Baroda, addressing a chamber of commerce in Calcutta today.

“There’s a preponderance of factors pointing at an interest rate in the credit policy, and if that happens, banks will have to cut lending rates by as much as 3 per cent over the next two quarters.

“Even if the Reserve Bank keeps interest rates unchanged, banks may have to cut lending rates by 1.5-2 per cent to push credit offtake,” Shenoy said. Average lending rates for Indian banks range between 10.5 to 11 per cent.

Shenoy says, in three months there’ll be no takers for loans above prime lending rate (PLR), which ranges between 10-12 per cent for public sector banks. “Though banks may not change the PLR, all loans will have to be disbursed at sub-PLR rates. And to cut lending rates, banks would have to reduce deposit rates as well. For instance, interest rate on a one-year term deposit could fall by say 100 basis points to 4.5 per cent,” he added.

Since banks would not be able to cut deposit rates by the same margin as lending rates, there would be greater pressure on margins, Shenoy said. Net interest margin — or the difference between interest earned and spent — is pegged at 2.75-3.25 per cent for Indian banks at present.

Insurance venture

Bank of Baroda is looking to set up a life insurance subsidiary in partnership with a foreign company. Shenoy said the bank had initiated talks with a few foreign companies for its proposed insurance venture. The bank, however, does not expect to kick it off in the foreseeable future.

“We hope to appoint a vendor for implementation of Gartner’s recommendations on e-business strategy by the end of this year, following which we could concentrate on our proposed insurance venture,” Shenoy explained. The bank proposes to invest Rs 500 crore on “business transformation”.

The bank has set ambitious growth targets for its asset management arm. “Assets under management of our AMC has grown from Rs 30 crore to Rs 400 crore in a few months. The aim is to grow to Rs 1,000 crore by the end of this financial year, following which we’d consider growth through acquisitions,” Shenoy said.

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