Bank deposits up 10%, credit 13% in FY19

MUMBAI: Amid high expectations that the Reserve Bank of India will ease the cost of funds for borrowers in its policy on Thursday, its governor Shaktikanta Das has the tough task of ensuring that banks pass on the earlier two rate cuts.RBI has reduced its repo rate—the rate at which it lends to banks—from 6.5% to 6% in two stages this year. The weighted average marginal cost lending rate of banks has, however, risen from 10.38% in January to 10.42% in April 2019.Bankers say it is not possible to bring down the cost of funds without reducing deposit rates. But despite the cut in policy rates, banks have not been able to bring down their deposit rates as these have grown slower than loans.For the year ended FY19, bank deposit growth has been 10% as against 13% growth in credit. For large banks like SBI, deposit rates have come down only marginally (around 25 basis points). A couple of large banks like Bank of India and Bank of Baroda have raised their lending rates after their cost of funds went up due to tight liquidity conditions.RBI has been taking steps to ease liquidity by swapping dollars with banks and buying back government bonds. It may have to do more of the same to make funds cheaper.The second challenge in bringing down the cost of funds for borrowers is the reluctance to lend to some sectors.“The impact of the monetary policy on the Indian economy is felt with a significant lag, but the situation at the current juncture has become further complicated due to the ongoing crisis in both the banking and the shadow banking sectors. While banks are struggling with high NPAs, NBFCs are struggling with solvency issues, leading to a credit freeze,” said Sunil Kumar Sinha, principal economist with India Ratings.Pranjul Bhandari, chief economist at HSBC, feels that the RBI is likely to cut rates by 25 basis points in its policy on Thursday. “Weaker private sector activity dragged growth lower than expected, offsetting the rise in government spending. The slowdown was evident across agriculture, industry, investment and exports. We expect a 25bps rate cut in the June meeting, which would take the repo rate to 5.75%. Thereafter, we expect the RBI to maintain liquidity at a slight surplus,” she said in a report.