Bankers have suggested that a reduction in rates would alone not be able to bring cheaper loans into the market. This comes as a result of speculations of RBI's rate cuts in the next week's mid-quarterly review.
The banks are however of the hope that the central bank reduced the cash reserve ratio (CRR), which is the minimum ratio of a bank's total deposit which it must keep with the RBI.This would increase liquidity and allow lending at lower rates.
The RBI had brought down the repo rate to 8%, when they last slashed the rates by 50 basis points on 17th April.
"If CRR is cut our costs of funds will come down immediately so we'll be able to pass on the benefit to our customers," said Mr. B.A. Prabhakar, Chairman, MD, Andhra Bank. He further added that the bank might cut the deposits rate if the liquidity crunch continues.
Banking executives also added that CRR would spur an immediate decrease in lending rates, while if policy rates are slashed, the effect on lending rates might be seen in 2-3 months.
Further, the falling demand for credit has made it difficult for the banks to bring down their rates on deposits.
High costs of fund, and low net interest margins are also acting as a barrier to reduction of lending rates.
"Even if (policy) rate is cut by 50 basis points, the impact on our resources or earnings is not much. Whereas if you release 50 basis points in CRR it can have a good impact. There is a big difference in terms of arithmetic," added Mr. Sunil Pant CGM, SBI.