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• Banks are preparing to lower lending rates by relying less on high-cost retail deposits.During the fortnight ended January 13, bank deposit growth during the quarter fell 46 per cent to Rs 59,61,015.72 crore. Bank credit growth has decelerated 21 per cent to Rs 4,48,966.98 crore during the same period. Banks will be forced to bring down their interest rates and spur credit growth for better profitability.Bank of Baroda’s chairman MD Mallya said, “Banks will first have to bring down their costs before brining down their lending rates. The reliance on high-cost retail deposits will have to come down gradually so that our overall cost of funds comes down.”

• Bankers, however, say that bank credit will pick up because banks will direct more credit to productive sectors so that their advances growth picks up. The Reserve Bank of India (RBI) freed up Rs 32,000 crore in the banking system by cutting the cash reserve ratio (CRR) by 50 basis points.Retail deposit rates for most banks are around 9.5-10 per cent, while the base rates vary from 10 to 10.75 per cent. So, the banks have little room to reduce their base rate until they bring down deposit rates.

• “Deposit and lending rates will move in tandem. But, we will have to shortly realign our fixed deposit rates,” said a senior banker with a private bank.Credit deceleration was particularly sharp for public sector banks with growth moderating from 21 per cent to 15 per cent up to December 31, 2011, according to the RBI data. “Disaggregated data for November showed that there was a general deceleration in credit flow across sectors, except for personal loans. The deceleration was particularly sharp in agriculture, real estate, infrastructure, engineering, cement and cement products,” RBI said in the third quarter review of monetary policy on January 24.

• During the third quarter, of 2011, about 23 banks raised their base rates by 10 to 100 basis points even as the modal base rate of banks remained unchanged at 10.75 per cent. The slowdown in total resources flow to the commercial sector and the peaking of base rates of banks reflects slowing down of investment activity. Pratip Chaudhuri, chairman and managing director, State Bank of India (SBI), told reporters after RBI announced the credit policy that the bank would reduce rates for productive sectors without bringing down the base rate. “We will bring down the risk premiums for sectors that are productive,” he said.RBI also revised its credit growth projection to 16 per cent from 18 per cent.

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