CRR cuts to bring down lending rates

Bankers on Wednesday said that lending rates may come down in response to a series of cuts by RBI in mandatory deposit requirements for banks but hastily added that a soft interest rate regime could still be some time away.

As a precursor, country's second largest PSU lender Punjab National Bank has already effected 50 basis point cut in retail loans including housing and auto loans.

Commenting on the CRR reduction, PNB Chairman and Manging Director K C Chakrabarty said, "It is a welcome step and would ease liquidity pressure. To ensure credit to the borrowers at a lower rate during the festive season we already have cut interest rate in the retail segment even before RBI announced the measure."

However, the bank has to assess the asset liability condition as well as the market rate before taking decision on further cut in interest rates, he said.

PNB today slashed interest rate on housing, educational and car loans by 50 basis points, he said.

"Our bank is the first bank to reduce interest rate on the above loans to pass the benefits to our customers on account of reduction of Cash Reserve Ratio by RBI," he said.

Once the liquidity condition eases, the logical conclusion is moderation in the interest rates, said Indian Bank Chairman and Managing Director M S Sundara Rajan.

Welcoming the move that would infuse Rs 40,000 crore in the banking system, he said, it would help in credit expansion for the productive sector.

RBI in last 10 days have announced 2.5 per cent reduction in CRR infusing liquidity to the tune of Rs 1,00,000 crore in the cash-starved banking system.

Softening in interest rates would come with a time lag. The fresh cut, however, would stabilize the rates immediately, said Oriental Bank of Commerce, Executive Director Ratnakar Hegde.

Going forward, easing liquidity condition would definitely have some impact on rates, Hegde said.

Bank of Maharashtra Chairman and Managing Director Allen C A Pereira said immediately there would not be any impact on rates. Before cutting rates banks have to re-work cost of fund as most of them have raised deposits at high cost.

Banks have to take the cost of borrowing into account while deciding about the lending rate, he said.

In one stroke, the government and RBI announced infusion of Rs 65,000 crore in the market. Out of the this, Rs 40,000 crore is being released to the bank through CRR cut of one per cent and Rs 25,000 crore would be release to financial institution by RBI under the debt waiver scheme immediately.

"RBI is monitoring developments in the financial markets closely and continuously and would respond swiftly and even pre-emptively to any adverse external developments impinging on domestic financial stability," the apex bank said in a release.

Similar cuts announced by RBI since October 6 has injected a whopping Rs 60,000 crore and along with today's development, banks would get Rs 1,00,000 crore.