20000117

Indian banks unlikely to cut rates immediately

BOMBAY: Indian banks are unlikely to lower deposit or lending rates immediately despite a cut in rates on some benchmark government run-savings schemes, bankers and sector analysts said on Sunday.

Concerns over losing deposits to more remunerative mutual funds and over corporate performance near the end of the fiscal year would weigh against giving in to a long-standing demand from business for lower rates.

"We will watch the situation for some time and see how things shape up over the next fortnight before taking a decision," said A.T. Pannir Selvam, chairman and managing director of state-run Union Bank of India.

"Given the uneven playing field with mutual funds, banks will protect their turf to prevent a run on their deposits."

Banks, already facing stiff competition from mutual funds for retail savings, are wary of cutting deposit rates.

Debt mutual funds are able to offer tax free returns of 11 to 12 percent, while state-run banks offer returns ranging from 4.5 percent on savings deposits to 11.0 percent on term deposits. In addition, interest on bank deposits is subject to tax.

Bankers also said year-end considerations, with the financial year ending on March 31, could delay a revision in rates.

"We will take a view keeping in mind that we are only two months away from March as we don't want to hurt the balance sheet at the year end," Pannir Selvam said.

Banks have been unable to accede to demands for lower interest rates primarily because of the high cost of deposits, their main source of revenue.

"We have to look at our net interest margins which are already under great pressure and the realignment may take some time," said R.S. Hugar, chairman and managing director of Corporation Bank.

Indian banks quote lending rates from 12.0 to 16.5 percent for their prime customers. Industrialists have argued that Indian bank lending rates are too high, considering inflation is under three percent.

Analysts said low inflationary pressures influenced the government's decision to cut rates last week but this was a structural change that was unlikely to have an impact in the short term.

"There is sound economic justification for the cut in small savings interest rates since the high inflationary expectations have been considerably weeded out, but there may not be a cut in benchmark RBI rates this fiscal year," said Vasan Sridharan, treasury economist at Standard Chartered Bank.

The government last week cut the public provident fund deposit rate to 11 percent from 12. The rate on some post office deposits was also cut by 100 basis points to 10.5 percent.

Analysts said the case for banks to lower lending rates was weakened by their heavy transactions costs, which include generous provisions for non-performing assets (NPAs).

State-run banks, which account for more than three fourths of the banking industry's deposits and advances, had gross NPAs worth 517.1 billion rupees at end-March 1999. These have risen by nearly a third over the past six years.

Another key factor is the government's fiscal deficit. Heavy government borrowings compete with private industry's, keeping rates firm.-Reuters