Deposit rates are likely to be reduced but lending rates may not change soon. Finance minister P Chidambaram on Wednesday asked state-owned banks to reduce one-year deposit rates to 8.5% from the current levels of 9.5% and above.

Further, he suggested that banks could pass on the benefit of reduced deposit rates to the borrowers by keeping lending rates steady, but bankers ET spoke to ruled out softer lending rates for now. He said that the 50 basis points hike in the cash reserve ratio (CRR) will not impact the 24% credit growth this year.

"Banks may lower deposit rates of one year maturity by 0.5%. Some banks have already done that and interest rates will come down to 8.5%. My impression is that it will stabilise at that level," Mr Chidambaram said after his meeting with CEOs of state-owned banks. Bankers on their part feel that deposit rates are likely to fall lower than 7.5%.

"Banks have assured me that credit needs of the productive sectors will be met. Individual banks have to take a call on lending rates. In any case I am told many customers borrow at rates below BPLR (benchmark prime lending rate). The hike in CRR will not have any serious impact on the 24% credit growth for this year," he said. Banks have carried out substantial rebalancing of portfolios, he added.

Bankers are of the view, that there is no case for reducing rates for borrowers, because liquidity is going to be tight once the busy season kick-starts in three months time. "The short term interest rates may not harden, but medium to long-term rates will not be soft, once the busy season kicks in. It therefore does not warrant a reduction in lending rates" a banker said.

Banks feel that the hike in CRR will not have much impact and said that there would still be surplus liquidity in the system. "Though deposit rates will come down, it cannot translate into a reduction in lending rates. We have to keep our NIMs in mind," a banker said.

The FM conceded that liquidity tightening by RBI is expected to hit banks' net interest margin. However, the currently healthy balance-sheets of banks will help cushion the impact on the bottomline. He said RBI's concerns on liquidity is legitimate.

"The RBI has used two instruments, one obligatory -- the CRR hike -- and the other is the window for banks -- raising the cap on reverse repo.
The net impact of these measures will hit the NIM of banks' marginally, but they have healthy balance-sheets and can cushion the impact." Draining Rs 16,000 crore on the system on account of CRR is estimated to have a 0.03% impact on the net interest margin of banks, he added.

"There was unpredictability as far as interest rates were concerned. A significant amount of loans have been sanctioned, but not disbursed, because borrowers were anticipating a softer bias on lending rates.

That has now been ruled out," Mr SK Bhattacharya, managing director, State Bank of Bikaner and Jaipur. "No bank will pay 8.5% on deposits, when banks can park their funds at 6% at the reverse repo window," he added.

"The benchmark yield of 364 day T-bill has come down by 140 basis points. This is an underlying indicator for deposit rates. So consequently, deposit rates must soften too, else there will be a widening in the yields," Canara Bank chairman MBN Rao said.

The 9.5% yield on one-year deposit was a blip. It is higher than the yield on 10-year government paper. He added that the increase in lending rates were gradual, however deposit rates grew too fast in the last quarter of 2006-07.

In his meeting, the FM also asked banks to step up lending to minorities from 9% of total priority sector advances to 15% over the next three years. The government has identified 121 such districts.

Some of the banks have tripled their credit flows in the past few years. With the overall size of the portfolio going up, the quantum of NPAs in absolute terms are increasing as well. But bankers are not worried, because in proportionate terms, NPAs are only 2% of the total portfolio.