In the wake of the Reserve Bank of India slashing its benchmark lending rate, commercial banks will start cutting their base rates "sooner rather than later," Bank of Baroda CMD Ranjan Dhawan told CNBC-TV18.
In an interview with Latha Venkatesh and Sonia Shenoy, Dhawan, however, said that he had not seen any pick-up in credit growth.
"I assume that it is still a couple of quarters down the road. It will take five to six more months," he said.
Below is the transcript of the interview on CNBC-TV18.
Latha: What is the situation likely to look now, do you think asset-liability committee (ALCOs) are slated to meet this week or maybe next week; you have a truncated week now, by next week will we get to hear any rate decisions?
A: I am sure that ALCOs will be meeting next week. It is important to see that despite the rate cut there has been no impact on yields. So, I am not quite sure whether you could expect rate cuts as soon as next week.
Going forward, the entire inflation regimen has become very benign with wholesale price index (WPI) becoming negative and consumer price index (CPI) also hovering around 5 percent.
So, I do believe that rate cuts are in order and going forward rate cuts will occur but whether they will occur in the next two or three weeks, I can't say but they are inevitable; they will occur sooner rather than later.
Latha: When did you take your first deposit rate cut, wasn't it sometime in October?
A: We took a deposit rate cut as far back as November. We have since seen that yields are softening but so far we are as yet holding on. As I said, we will take a decision sooner than later. Normally banks have not gone in for base rate cuts. I think sooner rather than later we will do so.
Latha: We could understand that in October-November banks were telling us that their historical cost of money will not fall so quickly and so they can only give deposit rate cuts immediately. However, now you have been with your deposit rate cuts for four-five months, you would have weeded out some of your high cost deposits therefore when the base rate cut comes how much might it be?
A: I would imagine that most base rate cuts would be of the order of 25 basis points. When we cut deposit rates they affect after a lag whereas if we cut advances rate they affect us immediately.
Having said that, you could see from the various statistics given out by the banks that their yields on advances have been consistently falling, for instance, borrowers who earlier were paying 11 percent are paying 10.5 percent or even base rates to many banks.
So, the bargaining power of borrowers has increased and in fact yield on advances has come down. It is not as if there is no rate cut, effectively for most banks there has been a rate cut. Formally when they would announce I would imagine a 25 basis rate cut would be in the offing.
Sonia: Credit growth has been very muted for the last three to four quarters, any chance of a revival anytime soon?
A: It doesn't look like it. We were hoping that by this time there would be some revival in the credit demand but on the ground we are not seeing any signs. I am afraid that the whole cycle depends upon the revival of the economic activity. There is a lot of sound from various sources that the investment activity will put up; so far we have not witnessed any.
The Budget is good one, it is a very long range Budget. They are promising to build 1 lakh kilometers of road; they are promising to put up five power plants. With the coal auctions now in progress we hope that the entire gamut of stalled projects would finally take off.
So, I would imagine that over a period of time credit demand will pick up. However, I assume that it is still a couple of quarters down the road. It will take five to six more months, currently because if credit demand has to pickup people have to plan and by the time the credit applications reach the bank it will be still a few months down the line.
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