RBI FLASHES THE RATE CARD

Home, Auto, Corp Loans To Soften Over Time; ICICI Responds With 50 Bps Cut

 DUVVURI Subbarao's patience is running out. For months, the Reserve Bank of India governor tried to make his point through policy hints, using an understated language that only central bankers speak. It didn't work. Indian banks were slow to cut interest rates, even as Mr Subbarao and his team aggressively lowered key policy rates and pruned reserve requirements to flood banks with funds. On Tuesday, he chose to take them head on.
    Just when banks felt they had sold their point — that a rate cut by RBI would not result in lower lending and deposit rates — RBI in its annual policy cut the benchmark repo and reverse repo rates by 25 basis points each, to 4.75% and 3.25%, respectively. Repo is the rate at which RBI lends to banks while reverse repo is the rate at which banks park their surplus money with the central bank. With banks placing over Rs 1 lakh crore with RBI everyday — the amount of surplus money in the system — a lower return under reverse repo may prompt banks to park less money with the central bank. Instead, Mr Subbarao hopes banks will lend a slice of the surplus to corporates, individuals and small businesses, to revive a sagging economy.
    "Deposit rates must come down in tandem with policy rates for lending rates to come down," the governor told newspersons after his meeting with bank CEOs, a few of whom had tried to argue how difficult it was to lower deposit rates and how a fast loan growth could saddle the banks with non-performing assets (or irrecoverable loans). Mr Subbarao didn't buy any of that. "Credit quality and credit expansion may have a tradeoff. But managing the trade-off is the essence of banking," he said.
    The policy statement and the meeting that followed was a mix of clear rate signals and a fair dose of moral suasion. Bankers took the hint. After market hours, India's second-largest bank, ICICI, lowered its prime lending rate — the rate at which most loans are linked — by 50 basis points (bps) and deposit rates by 25-50 bps. HDFC Bank officials said the bank would lower its deposit rates by 25 bps in select maturities. According to banking circles, some of the large state-owned lenders are also expected to announce rate cuts in the coming weeks.
    Underlying the persuasive measures was the lurking concern over growth. Tuesday's rate cut is also a reiteration of the central bank's commitment to growth, which RBI forecasts would be 6.5% this year against 7.1% for the year ended March 31, 2009.
    Mr Subbarao has taken the opportunity to propose a string of measures that could make the financial markets more vibrant and, possibly, safer. The most significant of these is a settlement mechanism for corporate bonds, which, if implemented, would minimise counterparty risk.
MINT FRESH
What's in it for you and me?
It's a matter of time before banks start cutting rates. Home and car loan borrowers to benefit. If you are planning to put money in fixed deposits, do it now. Your savings bank accounts may fetch more.
What does the Guv want?
Mr Subbarao wants banks to lower their benchmark prime lending rates so that interest on most loans, old as well as new, soften. While banks are opposing this, many of them are expected to cut rates within a month.
Is he spotting any sign of revival?
Even while forecasting a lower growth of 6.5% this year (as against 7.1% last fiscal), the governor feels that rural demand and lower prices of crude and other commodities would trigger revival. Inflation may turn negative, but there are no fears of a deflation caused by demand erosion.
BANKS' RESPONSE
ICICI lowers PLR by 50 bps and deposit rates by 25-50 bps HDFC Bank to lower deposit rates by 25 bps in select maturities Some large PSU lenders also expected to cut rates in coming weeks Foreign banks can open branches, ATMs
MR SUBBARAO also changed the rules of the game for the securitisation market, where banks quickly palmed off loans soon after originating them — a practice many felt was building a credit risk in the system. He advised banks to build floating provisions that could act as a buffer in tough times. While foreign banks would continue to be barred from M&As in India, they would have more freedom to set up new branches and ATMs.
    ET NOW broke the story about foreign banks being barred from M&As in ET's Tuesday edition. It was a policy that tried to plug some of the gaps in the financial services sector, sensitise institutions on the risks they face and a big push to cut rates amid faltering growth.