State-owned banks flag deposit rate woes on policy eve

State-owned lenders have alerted the banking regulator that their inability to cut deposit rates as fast as loan rates is taking a toll on interest margins, three people familiar with the development said.

- Subhana Shaikh

State-owned lenders have alerted the banking regulator that their inability to cut deposit rates as fast as loan rates is taking a toll on interest margins, three people familiar with the development said.

Since many floating-interest rate loans are linked to an external benchmark like the repo rate, any reduction in the benchmark rate leads to an immediate rate cut for the borrower. However, deposit rates are fixed, meaning banks can reduce interest rates only on fresh deposits and renewals which happens down the line.

In a meeting with the Reserve Bank of India (RBI) officials about 10 days ago, heads of multiple state-owned banks voiced concerns about the impact of external benchmark linked rates, the three people cited above said on the condition of anonymity. The discussion comes ahead of the monetary policy committee's 3-5 December meeting.

"We have passed on 100 bps (basis points) of cuts on the asset side but have been able to reduce deposit rates by only 30 bps, creating a 70-bps spread compression, and this gap cannot be adjusted through ALM (asset-liability management) alone. Every bank has conveyed this to RBI,” said a senior state-owned bank official, one of the three people quoted earlier.