Despite the financial year-end concerns, all banks are expected to reduce interest rates on deposits soon, banking sources said here on Monday.
“Banks cannot reduce the rates on the existing deposits, and they have to pay the contracted rate of interest till the maturity irrespective of slashing deposit rates. More precisely, the rate cut on deposits is applicable only for fresh deposits or on renewal of existing deposits when they mature,” banking circles said.
By and large, deposit rate cuts will affect pensioners, small, medium and high net worth individuals, and corporates. They will feel the pain, and premature withdrawals will result in penalty charges and diminished ‘actual’ returns.
The reason for the slow pace in rate cuts by banks is mainly due to balance sheet concerns. Financial year-end is fast approaching, and it’s a fact that the repo component (borrowings from the RBI) constitutes only a small portion of banks’ liabilities. A major chunk is deposits, particularly, time deposits, which carry a higher contracted rate of interest.
Unless the banks reduce the rate of interest on deposits, practically they will not be able to reduce their External Benchmark Lending Rates as this will adversely affect the Net Interest Margin and bottom line of banks. Banks have to look into the Marginal Cost of Lending and Asset Liability Management. Banks also have to take into account the deposit cost, overhead expenses, and opportunity cost of maintaining the Statutory Liquidity Ratio and Cash Reserve Ratio.
“All banks must move cautiously on cutting interest rates on loans and advances and deposits, as a ‘freer’ rate cut could fuel inflation. Indeed, RBI’s 25 bps repo rate cut for the first time in five years was timely and prudent. However, the central bank going for a fresh repo rate cut in its April review meeting cannot be ruled out as it could stimulate economic growth. It is an indisputable fact for India that whatever the weight of deposit rates, lending rates and inflations, RBI will not favour a weaker monetary policy. Today, the cost of living in India stands at uncomfortable levels, and the road to a reasonable level of inflation looks bumpy. Ease of doing business, and easy bank credit access seems volatile due to a series of economic factors, including the incomplete dilemma of US reciprocal tariffs. There is always a gap between the banker’s policy and the customer- expectations, and it cannot be bridged easily,” D Vinubhai Patel, a high net-worth investor, told Free Press Journal.
“RBI is expected to shift its stance from ‘neutral’ to ‘accommodative’ in the ensuing policy. However, it may also opt for a pause, as two consecutive rate cuts may not yield desired degree of results, and can be counterproductive, particularly when banks are yet to pass on the rate cut benefits to borrowers,” said R. Madhusoodanan, financial expert, lawyer and a former SBI official.
Despite cutting rates, liquidity concerns exist, and the RBI decision of the $10-billion buy-sell swap (3-year tenor) looks good, and experts believe liquidity will improve gradually. Banks will sell dollars to RBI and simultaneously agree to buy the same amount of dollars at the end of the swap period.
A few banks have already reduced interest rates on loans and advances, and others will soon reduce rates despite the year-end concerns. Effective from February 15, 2025, largest lender SBI has cut lending rate for home loans by 25 bps to 8.25 per cent. It has also reduced EBLR by 25 bps to 8.90 per cent. PNB has revised home loan rate to 8.15 per cent under various schemes. Customers can benefit from a complete waiver of upfront processing fees and documentation charges till March 31, 2025. Bank of Maharashtra slashed interest rate by 25 basis points on retail loans, including home and car loans. The rate for home loan has been reduced to 8.10 per cent.
