RBI didnt,but banks may pause

The Reserve Bank of India may not have stopped tightening the monetary policy,but bankers are unlikley to increase loan rates since demand for credit remains muted.

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The Reserve Bank of India (RBI) may not have stopped tightening the monetary policy,but bankers are unlikley to increase loan rates since demand for credit remains muted.

Says Srinivasan Varadarajan,executive director,Axis Bank: This time around,we don’t anticipate any increase in the cost of funds since deposits are growing at a steady pace. Moreover,demand for credit has been somewhat muted,so we don’t believe there will be an increase in loan rates just yet.

In the first five months of 2011-12,non-food credit has increased just 2.5% versus a 3.4% growth during the same period last year. Banks lent about R96,900 crore during this period,lower than the R1.08-crore lent in the corresponding period last year.

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Given the subdued demand for loans,both from the wholesale and retail segments,as also the competition in the industry,banks are not able to increase loan rates. Says BA Prabhakar,executive director,Bank of India: I think the rate hike will be passed on with a lag effect. I don’t think it will happen immediately. Most bankers have been complaining about lack of sanctions in new projects and say demand is mostly coming only for previously sanctioned projects.

At its monetary policy review meeting on July 26,the RBI had revised the projection for the growth in non-food credit growth to 18% for the current year from the earlier19%. Says Alok K Misra,CMD,Bank of India,The decision to pass on the rate hike will depend on how the overall economic situation evolves. We may see a lag effect in the transmission of today s rate hike.

Adds S Raman,CMD,Canara Bank, “There is some slowdown in the demand for home loans at the moment so rates ae unlikely to go up immediately. In fact ,we are looking at waiving off processing and documentation charges to create demand.”

The poor demand in the home market is also partly because large corporates are accessing funds at a lower cost from the overseas market. Between April and June 2011,companies borrowed $12.21 billion through the external commercial borrowing (ECB) market,almost double of the $6.45 billion borrowed during the same period last year.

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SS Mundra,ED,Union Bank of India,said,It is becoming increasingly difficult to pass on the higher rates to the borrowers.

Bankers are expecting a spurt in demand for loans in the festive season,but do not believe that it will warrant any increase in deposit rates except in some select tenures. Says Misra,With enough liquidity at their disposal,banks are unlikely to increase deposits rates in the near future.

Adds Mundra,Deposit rates are already at elevated levels,but we will take a call after assessing the situation.

M. Narendra,CMD,Indian Overseas Bank believes deposit rates are likely to go up by 25 basis points for a tenure of less than one year. We may increase rates in the first week of October, he said.