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RBI rate cuts no panacea to boost corporate credit offtake – DBS Bank

The recent cut of a quarter of a percentage point in key interest rates by the Reserve Bank of India will not have any immediate impact in rates charged by banks on loans, DBS Bank said in a note. It also said the RBI is likely to go for another 50bp reduction in interest rates by the Jun quarter.

As a result, the bank said, credit offtake by companies is also unlikely to improve immediately due to uncertainties and the availability of alternatives.

“Only two banks have lowered their minimum lending rate in wake of the central bank’s decision, with others adopting a wait-and-see approach,” DBS Bank said. “…banks are unlikely to lower lending costs swiftly.”

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Such rate cuts alone will not result in a hike in loan-taking by big customers in India, DBS said. The bank gave three reasons for this – pre-cuts in anticipation of the rate cut, concerns over asset quality and the availability of alternatives. RBI was under tremendous pressure from industry lobbies to start cutting interest rates in a bid to help companies avail of cheap loans and produce more, boosting a slow economy.

“Rate cuts are unlikely to be a panacea for credit activity, even if a handful of banks jump into the easing bandwagon this week.

“Firstly, reduction in deposit rates routinely front-run any change in the borrowing costs. In fact, selected banks started lowering deposit rates as early as 2H 2014, while holding loan rates unchanged. Any bunched-up cut in the lending rate is likely to be smaller than the Repo cut, thereby posing downward rigidity. Concerns over asset-qual­ity deterioration and higher provisions will also push banks to exercise more due-diligence and follow stricter guidelines before lending funds.

“Next, even as the RBI has set the ball rolling, there is uncertainty on the scale of cuts and duration of the easing cycle. Market expectations fall in the range of 25-100bps more cuts this year… Hence, insti­tutions are likely to tread with caution, especially as the RBI will defer ag­gressive cuts should the output gap narrowly considerably or external risk flare-ups.

“Finally, even if the banks’ loan rates are lowered a notch, businesses might still prefer other cheaper funding alternatives, in­cluding corporate bonds/ commercial papers, for working capital and oth­er short-term funding needs. This is because the money market bor­rowing costs are at least 100bps lower than the bank rates.”

Instead, it will be real demand in the economy that will prove to be a sustainable factor that will drive credit offtake, said the bank.

“Demand for funds, especially capex requirements, are only likely to rise once demand conditions have improved considerably. Capacity uti­lization rates eased to 70% this year from over 80% in FY11-12, suggesting sig­nificant slack in the system. Hence while credit growth has bottomed out, the pace is unlikely to deviate from 10-13% YoY growth until domestic demand is on a clear upswing.”

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