Banks have begun lending at very low interest rates to meet the credit targets for 2009-10. Sources from industry say last week Indian Oil Corporation (IOC) raised Rs 1,000 crore from banks at a cheaper rates than what banks pay their depositors.
IOC paid 4.75% for 90-day loan at a time when banks are paying 5.5% for three months through the commercial deposit route. In effect, banks have lent money to corporates way below their cost of fund.
RBI has projected a 16% credit growth while most government-owned banks have indicated to the finance ministry that they would achieve 18-20% credit target. However, this fiscal, banks have seen very poor loan demand as a result. RBI revised downwards twice its credit growth projection from 20-18% and subsequently to 16%.
An internal study by The Economic Times said banks will have to lend close to Rs 1.30 lakh in March to reach the projected 16% credit growth. The poor demand in credit and high liquidity overhang has forced banks to lend at lower rates.
In their desperation to meet credit targets, banks are willing to extend loans for even one year at very low rates despite expectations that the cost of funds may shoot up in the next fiscal. Banks are extending one-year loans to top-rated corporates in the range of 7.5-8%, which is only marginally above the 6.50-6.75% they are paying out on one-year certificate of deposits.
However, banking analyst say lending at thin margins will not affect their bottomline in the fourth quarter of this fiscal. This is because banks are to replace high-cost bulk deposits with lower rate of deposits, which would help them maintain good margins.
For instance, bulk deposit mobilised for a year in March 2009 for 9-10% would be replaced by 6.5-7% in March 2010, bringing down the average cost of funds for banks and making it possible to lend at wafer-thin margin. SBI margins have improved 2.82% in December 2009 from 2.30% in June 2009.
Further, banks expected interest rate to remain stable in the next quarter. In fact, in a recent media briefing, SBI chairman OP Bhatt said he does not expect lending rates to change in the coming months.
Mr Bhatt had further indicated that surplus cash with State Bank of India is in the region of Rs 50,000 crore, slight better than Rs 75,000 crore in December 2009.
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