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Banks won't slash loan rates this New Year

Dec 31, 2008 06:35 PM IST Business Business

New Delhi: Those waiting for cheaper home and car loans will be a disappointed lot. Network18 has learned that banks have told the Reserve Bank of India (RBI) that it is just not viable to cut rates further.

This comes even as sources say the RBI is expected to announce a cut of 50 to 100 basis points in key interest rates this weekend.

Here's why banks are refusing to lower rates further:

* Bankers say that a 50 basis point Cash Reserve Ratio cut adds only 8 basis points to their income.

* They say deposit rates are already down to around 8.5 per cent, hitting profits.

* They earn only 5 per cent interest on cash they keep with the RBI.

* Even then, they would rather keep the money with RBI instead of lending for less or bringing down deposit rates as it would club them with smaller players like post offices and Provident Funds.

* At present PSUs offer 8.5 per cent interest on one year deposits; post offices give the same returns and PFs give somewhere around 8 per cent.

* To effect a rate cut, banks will have to lower deposit rates to maintain a minimum 2 per cent margin to cover costs.

* They fear this may drive customers away to other instruments with higher returns.

Although the quantum of the cut is not known yet, Finance Ministry sources say that the RBI is expected to announce some big bang cuts. They also say that a package for infrastructure is expected soon. So the New Year might not be so gloomy after all.