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Banks may not hike rates soon
MUMBAI, JAN 18 (AGENCIES):
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Published on 19 Jan. 2010 12:36 AM IST
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Indian banks are unlikely to raise lending rates in the near term even if the Reserve Bank of India (RBI) signals a tightening of monetary Exit plans for Asia’s big 5 India’s road to economic reform policy by raising the cash reserve ratio (CRR) in its upcoming policy review in less than a fortnight, according to several bank chiefs. Bankers, economists and bond markets are anticipating a hike in the CRR, a slice of deposits that banks have to mandatorily park with the central bank. A large number of bank CEOs told ET that they will not consider hiking the prime lending rates (PLR) even if RBI hikes the CRR by half a percentage, or 50 basis points (bps). These bank chiefs do not want to tweak rates in the near term now, given the surplus liquidity in the system and poor demand for loans. The surplus liquidity sloshing in the banking system daily is on an average in the range of Rs 50,000 crore-60,000 crore, which is reflected in the money parked by banks with RBI through its reverse repo window. A 50-bps hike in CRR will drain out Rs 21,000 crore from the system. The CRR is now at 5%. The concerns which have arisen now on account of the poor demand in credit growth are largely because loan growth was 8.8% in the first nine months of this fiscal year, less than half of the projected growth of 18% for the full year made by RBI. Incremental credit (in the nine month till December 2009) aggregated to Rs 2,45,258 crore. Banks will have to lend around Rs 2,50,000 crore in the last quarter alone to meet their target of 20%, which appears quite unlikely. On January 8, State Bank of India chairman OP Bhatt had indicated to the media that interest rates will remain stable until June even if the CRR was raised by 50 bps. “All banks are looking forward for more economic activity. Credit growth has not happened in a significant manner in the past 12 month or more. But because of the high liquidity overhang, my view is that regardless of what RBI does... rates will remain stable till June,” Mr Bhatt had said. MV Nair, chairman, Indian Banks’ Association (IBA), the lobbying arm of local banks, and also CMD of the state-owned Union Bank of India told ET, “No action will be taken till March since there is abundance of liquidity in the system. The challenge is to promote credit growth. However, if the repo rate is hiked, it is a clear signal that we have to revisit our lending rates.” The repo rate is the rate at which the central bank provides funds to banks. Bank of India CEO Alok Misra, Oriental Bank of India CMD TY Prabhu, Dena Bank CMD DL Rawal and Federal Bank MD, M Venugopal told ET that they will not raise rates in response to a CRR hike, considering the ample liquidity in the system. However, Mr Prabhu felt that any hike in rates by RBI may not alter the interest rate scenario in the near term. “This is because credit offtake Exit plans for Asia’s big 5 India’s road to economic reform has just shown signs of revival and thus at this juncture it will not be prudent to raise lending rates,” he said. “At least, the rate hike will not take place before March 2010 even if there is a CRR hike,” Mr Rawal said. Bankers say that the spread between the sub-prime lending rates and PLR will narrow if the demand for credit improves in the last week of this fiscal year. Nearly 70% of the loans which are disbursed by banks are at rates below their PLR, which is termed as the sub-PLR rate. PLRs of most state-owned banks vary from 11.75% to 12.5% while those of private and foreign banks are in the range of 14% to 16%. Banking analysts say that Punjab National Bank (PNB) which has the lowest PLR of 11% may increase it by 25-50 bps if RBI hikes any of its policy rates. However, even after a 50-bps hike, PNB will continue to have the lowest PLR in the banking industry.

 
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