NEW DELHI: The foreign and private sector banks on Wednesday expressed their inabilities to reduce lending rates, citing non-availability of enough liquidity. There are not sufficient funds to meet lending requirements, private banks said, though they assured finance secretary Arun Ramanathan in a meeting on Wednesday that rate cut request of the government will be "seriously considered."
CMD of a private sector bank said on the condition of anonymity that since September, deposits of private and foreign banks have not shown much growth. Many people have withdrawn deposits from these banks to keep money with the public sector banks, thinking that government-owned banks would be safer than foreign and private banks, a fear-ridden outcome of global financial crisis and news of large scale bank defaults, bailouts abroad, he added.
A source said, many private banks are not even in a position to meet their existing credit commitments and being forced to borrow in the overnight inter-bank lending market to keep the promise.
As the interest rates in the inter-bank lending market is fluctuating between 7% and 20%, the bank chiefs hold the view that their average cost of fund is high. Lowering of the prime lending rate (PLR) will lead to reduction in the interest rates on the existing credit also, which will affect their profitability.
The private bankers said they would be able to cut lending rates only after the public sector banks reduce deposit rates, which in turn will increase deposit base of the former. ICICI Bank MD and CEO KV Kamath said interest rates won't go down in isolation.
Funding costs should come down before the bank can think of reducing interest rates. RBI's measures have infused liquidity, but it would be premature to say that liquidity is excess or short. The bank will wait and watch the liquidity condition for some more time before taking any decision, he added. Federal Bank MD and CEO M Venugopal said it may reduce the rate by 50 basis points, though there is no decision yet.