NEWS & ADVICE : FIXED DEPOSITS
PSU banks lending rates fall behind the deposit rates
By Neelima Shankar
Dec 3, 2008
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Until now the PSU banks' deposit rates are lower than the lending rates but the mismatch is supposed to narrow with time. However the private sector banks have refused to scale down their lending rates and are maintaining a spread of at least 225 basis points between the deposit and lending rates. Private lender declined to cut the lending rates on the basis that the cost of funds was high and the RBI needed to cut rates further. "The cost of funds is still high, so once it comes down, we will reduce interest rates," said HDFC Chairman Deepak Parekh.

Conversely a banker reported that one should not fall for the lending rates quoted by PSU banks. "Even if lending rates are lower does not mean they (banks) are lending," said a banking analyst. Bankers said that the banks are compensating the lower interest rate by other means. "What we do not get from interest income, we get from fee income. Plus, we restrict the supply by asking customer for a higher upfront of the total loan amount," said a banker with a PSU bank. This clearly states that even though the lending rates have scaled down by banks but the effective rate of interest have not declined in the same ratio.

Amit Khurana, Equities head at Collins Stewart feels that this variation between the deposit and lending rates is temporary in nature. "Most banks borrowed aggressively at high costs in mid-September (after the collapse of Lehman Brothers). By end of December, the impact of those high cost borrowings would be neutralized and we would see deposit rates coming down by December end," he says.

 


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