FUTURE PERFECT

New Delhi, Aug. 7: Bankers expect lending rates to stay put at current levels or even drop in the near future but a rise in the rates seems unlikely.

“Lending rates will not rise despite the CRR hike. Moreover, if inflation remains below 4.5 per cent, home and car loans can fall by around 25-50 basis points,” said Prakash P. Mallya, chairman and managing director of Vijaya Bank.

However, if the rate of inflation rises from its present level of 4.3 per cent, the government will intervene to contain the money supply, he added. On July 31, the Reserve Bank of India kept the reverse repo and repo rates untouched, while increasing the cash reserve ratio (CRR) by 50 basis points.

Banks lowered the interest on deposits instead of raising lending rates to absorb the impact of the CRR hike as lending rates were already very high. A further increase would have been counter-productive. Banking experts are optimistic that lending rates will drop by 1 per cent over the next six months.

“Availability of money in the sector, combined with a low credit offtake, will help banks reduce lending rates for everything from home to automobiles by 100 basis points,” said U.S. Bhargava, senior banking expert.

Given the abundant liquidity in the banking system because of a rise in deposits and a decline in credit offtake, prospects of a lending rate hike are very low, he added.

The figures for deposits and advances for the fortnight ended July 20 show that bank deposits have gone up 24.4 per cent year-on-year against 16 per cent a few months back. Credit growth has come down to 23.7 per cent from 31 per cent over the last couple of years.

“The net impact of a CRR hike on a bank’s net interest margin will be marginal at 0.05 per cent. With liquidity available in the market, banks feel it is necessary to reduce lending rates to increase the credit offtake,” added Mallya.

Vijaya Bank has recently reduced its overall deposit rate to about 8.5 per cent, but will wait for another two months before taking a call on lending rates. However, other bankers remain divided on the issue. The Union Bank said it would not lower home loan rates in the near future as they were reduced only three months back.