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With the interest rates on the lending side heading downwards, the banks' spreads were coming under pressure. Government security yields have been dropping and top corporates have been borrowing at rock-bottom rates.

MUMBAI, July 24

THE dominoes have begun to drop. After the State Bank of India cut deposit rates on Monday, other banks are following the cue with rate cuts ranging from 25 to 50 basis points.

According to industry sources, some banks had cut rates even before SBI but had "just not announced it". Officials at Bank of Baroda said it had pared deposit rates across all maturities by 25-50 basis points last Saturday. Bank of India (BOI) is understood to have reduced short-term rates by 25-50 basis points on Tuesday.

Among private banks, HDFC Bank cut short-term rates by 25 basis points last week. However on Wednesday, the bank said it was reviewing the situation again. Mr Ashish Parthasarathy, Head (Treasury), HDFC Bank, said: "Even though we had cut near-term rates last week by 25 bps, now that SBI has cut rates we are having a relook at our deposit rates. If there is scope for further reduction we will do it."

ICICI Bank is likely to cut rates in a week's time. According to Ms Chanda Kochhar, Executive Director, ICICI Bank, "We are reviewing the situation. We are looking at our cost of funds and at the rates prevailing in the market. We will take a decision in a few days."

With the interest rates on the lending side heading downwards, the banks' spreads were coming under pressure. Government security yields have been dropping and top corporates have been borrowing at rock-bottom rates. With project financing drying up, banks have been finding it difficult to find investment avenues.

"Most banks are flush with funds. They do not have to actively mobilise deposits. So we do not believe that this reduction in deposit rates will really discourage our depositors from banking with us," said a senior official with a public sector bank.

Another senior banker said, "Lending rates cannot be brought down further. The only reason term deposit rates are being reduced is because banks have to balance their assets and liabilities."

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