Lending rates for corporate and retail borrowers are unlikely to see a significant reduction in 2012-13, according to Crisil Research.
Continuing tightness in liquidity, increase in government borrowings, and the high cost of funds for banks will limit the decline in interest rates.
Lending rates are, therefore, likely to fall by 25-50 basis points (bps) over the next one year, lower than the 50-75 bps drop expected in the repo rate (the interest rate at which banks draw funds from RBI), as banks attempt to protect their margins. Banks, saddled with high cost of funds mobilised over the last one year and rising NPAs (non-performing assets) and restructured assets, may not pass on the entire reduction in repo rates to consumers, as they attempt to protect their profitability.
However, to stimulate credit demand, banks might selectively offer attractive rates to new customers by adjusting their spreads over the base rate, said the research arm of credit rating agency Crisil.
Liquidity in the banking system has remained tight despite RBI's phased reduction of 125 bps in the cash reserve ratio (CRR) since the beginning of 2012 (calendar year).
Average daily borrowings of banks under the liquidity adjustment facility were at Rs 1,34,000 crore for the four months ending March 2012. This is almost twice the RBI's comfort figure of one per cent of net demand and time liabilities.
The tightness in liquidity can be primarily attributed to lower accretion in deposits vis-à-vis credit growth, and RBI's intervention in the foreign exchange market to arrest the decline of the rupee.
The incremental credit-deposit ratio has shot up from 80 per cent as of September 2011 to 96 per cent by March 2012 due to low deposit mobilisation.
“We do not foresee the liquidity conditions easing substantially over the next few months due to the mismatch in deposit and credit growth and high expected government borrowings,” said Mr Prasad Koparkar, Senior Director, Crisil Research.
Centre's borrowing
The Central Government's borrowings for 2012-13 are Budgeted at Rs 4,80,000 crore, 9 per cent higher than the revised estimates for 2011-12. However, Crisil Research expects net market borrowings in 2012-13 to be around Rs 5,20,000 crore, and fiscal deficit at 5.5 per cent against the budgetary estimate of 5.1 per cent.
“The RBI's ability to cut repo rates will be constrained by fiscal slippage and inflation persisting above its comfort level. We expect the RBI to cut the repo rates by 50-75 bps during 2012-13,” said Mr Ajay Srinivasan, Director, Crisil Research.