Thursday, April 15

Rate Cut: HFCs holding rate cuts over high bond yields, cash crunch

Banks and housing finance companies (HFCs) are struggling to pass on interest rate cuts announced by the Reserve Bank of India this year due to sticky deposit rates, tight liquidity conditions and elevated bond yields.

The half-a-dozen banks that lowered their marginal cost-based lending rate (MCLR) in March are likely to abstain from further rate action, two bank executives said. Others including State Bank of India, the country’s largest, and HDFC Bank have cut their rates by 5-10 basis points.

Although the RBI reduced rates by 25 basis points each on April 4 and February 7, seeking to push economic growth, banks find it hard to pass on the benefit.

“Banks are not lowering their rates as deposit rates need to be lowered first,” said Madan Sabnavis, chief economist with CARE Ratings. “This cannot be done given the slow growth in deposits as households have shifted to equities and mutual funds. Currently, to meet their credit requirements, they have been sourcing corporate deposits at a higher rate.”

No other lender or HFC has reduced rates after the April 4 monetary policy review, although it is now expected that some may follow the SBI’s lead.

“We would like to see if the repo rate cuts translate into lower cost of borrowings and then decide on our lending rate cuts,” said the treasury head of a top five housing finance company.

“There are two issues. First, that market liquidity will be under stress till June, so HFCs have little room. Second, there is a lag in transmission of rate cuts by RBI,” said a senior executive with National Housing Bank, the regulator for HFCs.

The RBI’s rate cuts transmit with a few months lag, said Keki Mistry, vice chairman at HDFC Ltd., India’s largest mortgage lender, adding that while some HFCs have marginally reduced rates, it would not be equivalent to the policy cuts. The company lowered its home loan rates by 10 bps on February 18.

Mistry argued that there are three factors that lead to lowering of interest rates –falling bond yields, improving market liquidity and decreasing deposit rates.

“None of these happened on a sustainable basis after two consecutive RBI rate cuts,” he said.

Lenders including ICICI Bank, Bank of Baroda, Punjab National Bank and Union Bank of India reduced their respective MCLR by 5-10 bps in the 40 days following the RBI’s February policy action. “These may not go for further rate cuts,” the chief executive officer of a public sector bank said.

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