No need to raise lending rates immediately, say bank chiefs

Banks are unlikely to increase lending rates in the near future despite recent liquidity tightening measures announced by the Reserve Bank of India (RBI) to contain the rupee fall, as demand for loans have remained weak.

As liquid tightening measures were likely to be temporary, any change in lending rates would depend on the length of these measures, according to bankers.

"Loan demand is too weak. That is why there may not be enough demand. We are waiting because these steps are supposed to be temporary. So, unless they (RBI) linger on for very long, none of the banks are increasing their loan pricing," Pratip Chaudhuri, chairman and managing director of State Bank of India,  told reporters on the customary post-policy conference in Mumbai.

When asked how long can the banks hold on to the current lending rates, the SBI chief said that two to three weeks would be the normal waiting period for SBI after which it would take a call.

Recently, the apex bank has taken several measures like capping the borrowing limit under liquid adjustment facility (LAF) corridor, sale of government bonds through open market operation (OMO), minimum daily cash reserve ratio (CRR) balance, among others, to squeeze rupee liquidity to stem fall in the domestic currency.

However, these measures had pushed short-term money market rates along with government bond yields to higher levels, creating fear of increase in cost of funds for financial institutions.

But, RBI had indicated that these measures were short-term in nature and would be rolled back as rupee stabilised.

On this issue, some of the bankers also said that changes in lending rates will depend on the impact of liquidity tightening measures on cost of funds for banks.

"Ultimately, you have to look at the impact on total cost of funds of the bank..So, I guess we will have to look for the market dynamics on this and see how rates come off. As of now, immediately, we don't feel the need to raise rates but we will have to watch on what happens over the next 6-8 weeks to take a call," said Shikha Sharma, managing director and chief executive officer of Axis Bank.

Bankers also pointed out that unlike other financial institutions like mutual funds, banks have a stable way of funding and can endure these measures for long as compared to others.

Meanwhile, HSBC said in a report that rate cuts by the RBI are at least three months away since there is not much room for the apex bank to ease them now.

"We do expect this outcome to eventually materialise, but in our view it is not likely to happen until we approach or even head into the October-December quarter," said Leif Lybecker Eskesen, chief economist for India and ASEAN at HSBC.

"Rate cuts are, therefore, at least three months away," Mr Eskesen said.

"While we expect that the RBI will eventually be able to roll back its liquidity tightening measures as the exchange rate stabilises, it will likely not happen as quickly as the RBI hopes," he added.

Advocating quicker withdrawal of liquidity tightening measures, Mr Chaudhuri also said that these measures would increase the cost of borrowing of the central government and keep state governments away from raising further funds.

Also, given the liquidity tightening measures, the bankers requested for some relaxation in the provisioning norms in this tough environment. PNB chairman and managing director KR Kamath, who is also the chairman of the Indian Banks Association, said bankers requested the regulator to relax provisioning norms on restructured standard assets, which is increasing by 75 basis points every year for the banks.

Banks have also requested for increasing the HTM (held-to-maturity) percentage in the overall SLR (statutory liquidity ratio) portfolio to 25 per cent from the current 23 per cent given the tight liquidity condition, he said. Bankers also sought switching of AFS (available-for-sale) category bonds under the SLR to the HTM category, which is not allowed at present.

The apex bank, which had on July 23 asked banks to mandatorily maintain 99 per cent of CRR on daily basis, has been approached by the banks to look into this provision in this tight liquidity condition as bankers are facing difficulty in adhering to this norm.

It was also requested to conduct a LAF on Saturdays for meeting concerns relating to liquidity.

Later, replying to questions on bankers' demand, Governor D Subbarao said he will look into the requests but will not agree to all of them.

"Deputy Governor Anand Sinha will look into the demands over the next month to form a view on this matter," Mr Subbarao said.

On the bankers' demand for some relaxation in the new CRR mandate, RBI Deputy Governor K C Chakrabarty said banks should learn to do their cash management business better and that if a particular client is not meeting the obligations on time, the bank should make the client pay for it instead asking the central bank for some relaxation in reporting.

"We gave you 15 days CRR reporting time in the past due to non-computerisation of branches. But today, with all the branches on the core banking system, where is the question of more reporting time," Mr Chakrabarty said.