While private banks have reduced their lending rates, they have not done it in the same proportion as the public sector banks (PSBs). Both the PSBs and private banks have been the beneficiaries of large scale, low-cost deposits (triggered by demonetisation) in their current account and savings accounts (CASA), but a bolder attempt by PSBs seems to have been made under pressure, feel many economists. “There is no doubt that banks’ cost of borrowings has come down because of CASA going up substantially, but PSBs were reluctant to cut lending rates as they wanted these deposits to cover up their NPAs before passing on the benefit to borrowers,” says an expert with India Ratings & Research.
Economists agree that lower lending rates would make borrowings attractive both for businesses and retail consumers, but credit growth would also depend on how strong or buoyant is the consumer and business sentiment. Private sector banks that have a larger control over high net-worth individuals and are widely present in urban areas, would fairly have got as much (if not more) deposits as the PSBs, but their wait and watch approach indicates that sentiments are not that upbeat right now.
Moreover, to smoothen the demonetisation process, there has been quite a policy flip-flop by the government like the decision on CRR etc., that have made banks, especially the private sectors banks, wary.
So private banks would cut their lending rates but not so quickly and would probably wait for some kind of policy equilibrium from the government’s side.
Many feel that it would take at least two quarters to see whether low lending rates has, in fact, boosted credit growth that has come down to a mere 6%.
If the Indian economy is currently growing at about 12% in nominal terms, then credit growth should also be growing by 12%, at least.
Dr Jaijit Bhattacharya, partner at KPMG India, is hopeful that lower lending rates might kick start loan off takes. “From a retail perspective, it would be cheaper to take loans for personal consumption, including housing, auto, consumer durables, thereby giving a fillip to consumers’ spending,” he said.
The State Bank of India, which has come up with attractive home loan rates, “is already a formidable player in the home loan segment (second after HDFC Ltd), and in the absence of industrial credit demand, it could become aggressive in selling home loans,” says Angel Broking.