Govt Prods PSU Banks to Cut Loan Rates by March

BANKS IN A SPOT AS FUNDS STILL COSTLY

Finmin seen trying to revive investor sentiment before close of fiscal year

The finance ministry is nudging state-owned banks to cut lending rates before March-end, though most lenders had initially taken a stand to review interest rates only next financial year. 
This has not been communicated in writing, but at a recent meeting, senior ministry officials asked bank chiefs to consider lowering interest rates. 
Even after the Reserve Bank of India cut banks' cash reserve ratio (CRR) in January, signalling a reversal in its monetary policy stance, bankers had said it would take a while for lending rates to soften. Since CRR is the slice of customer deposits that banks have to keep as cash with the RBI, a cut in the ratio following repeated rate hikes was perceived as the onset of a dovish monetary policy. But since no bank has lowered returns on deposits since the RBI action, their cost of funds continues to be high. Banks are reluctant to lower deposit rates in February and March because they do not want to miss their annual deposit mobilisation targets. 
"It's a Catch-22 situation…Cost of resources has actually gone up for banks," said the chairman of a large commercial bank. 
Senior bankers declined to go on record on the matter. However, DK Mittal, secretary, department of financial services, said: "We have suggested banks to bring down rates in whichever sector and to whatever extent possible, and as quickly." The intention, he told ET, "is to create a positive environment and not to interfere with banks' operations". 
Ministry officials expressed their views to bankers about a fortnight ago. Following this, Bank of Maharashtra cut its base rate — the minimum rate charged from best customers — by 10 basis points to 10.60% and Central Bank of India lowered home loan rates by 25 basis points across various maturities. Last week, Union Bank Chairman MV Nair told ET that the bank is exploring if there is scope to lower rates in certain categories. 
A month before the RBI cut CRR, Union Bank had announced a token rate cut of 10 bps to 10.65%. Sending a Message to Industry, Borrowers 
According to Mittal, some rate cuts by banks may help to send across a message to industry and borrowers in general that the "investment environment will turn conducive sooner than expected". 
While banks may lower rates in some segments, more meaningful rate cuts can happen once bulk money becomes less expensive. Interest rates on certificate of deposit (CD) — an instrument banks sell to raise bulk deposits — have risen in the last one month. For instance, interest rates on one-year CDs are up to 10.15% from 9.80% a month ago. After the CRR cut, Aditya Puri, CEO of HDFC Bank, had said, "The RBI move enforces that interest rates are on downward trend. But if you want an immediate satisfaction…that would take some time. In general, cost of money should come down first." 
Industry circles said the finance ministry is looking at ways to revive investment sentiment, particularly after several economists in the private sector lowered their growth forecast for the year. The central bank too has revised its growth forecast to 7% for this fiscal from 7.6% projected earlier.