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Bankers to cut rates in the next few weeks - Views on News from Equitymaster
 
 
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  • Jan 17, 2000

    Bankers to cut rates in the next few weeks

    As the government has cut the interest rates for small savings and public provident fund (PPF) from 12% to 11%, banks and financial institutions expect the Reserve Bank of India to reduce the bank rate as a result of which they will in turn reduce their lending rates.

    However some bankers feel that a cut in PPF rate does not necessarily call for a cut in deposit rate of banks and also does not necessitate a cut in bank rate. The bank rate is affected by many other factors like inflation, credit growth and liquidity in the banking system and not just the rates offered on PPF. Some bankers feel that as interest rates have already come down in the last couple of years (from a PLR of 16.5% in 1995-1996 to 12.5% currently) a further cut would lead to a squeeze in margins of the banks. Others feel that the RBI will wait for a larger picture to emerge before reducing rates.

    The government's decision to cut the public provident fund rates could be seen as a signal to public sector banks to reduce their deposit and lending rates. The earlier rates of 12% on public provident fund rate was acting as a deterrent to banks to further reduce their lending rates. As the government was borrowing at 12% through PPF the banks could not reduce interest rates below this level. Now with the change in the interest rates on PPF banks would be in a position to reduce interest rates.

    Hence now the banks are free to reduce their lending rates and take advantage of the better economic scenario by targeting higher volumes to increase their profitability. Lower interest rates can also lead to higher demand for funds for capital investment as opposed to demand for funds only for working capital needs. However some economists are of the view that credit growth might not pick up despite the rate cut as real rate of interest based on current rate of inflation at 4% continue to be high at 8%.

     

     

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