Mumbai : Bankers unanimously agree that lending rates based on marginal cost of funds are likely to fall, following the withdrawal of Rs 500 and 1,000 currency notes from circulation, as the cost of funds is expected to decline, reports Cogencis. However, bankers weren’t sure of the extent of such a fall, citing lack of clarity on the liquidity situation by the end of this month.

On Wednesday, Axis Bank announced a 15-20 basis points reduction in its marginal cost of funds-based lending rates. “Cost of funds has come down but we will have to see how much it will be, because deposits mobilisation has remained strong. Since most of these flows are into low interest-bearing CASA (current and savings accounts) deposits, it is positive. But we do expect outflows and hence, any rate cut decision will estimate such outflows,” said a senior official of State Bank of India.

A decision to cut rates would be taken by the bank’s asset-liability committee, which would meet in the last week of November, he said. Marginal cost of funds-based lending rates, which came into effect from April and replaced the base rate regime for new loans, is calculated after taking into account the cost incurred on deposits and borrowing, among others. As people rushed to either deposit or exchange old currency notes, banks’ deposits have surged. Such deposits are expected to increase by around Rs 2.5 trillion, after factoring in the potential withdrawals, once automated teller machines and branches start functioning normally.

Analysts said that lending rates based on the marginal cost of funds are more dependent on changes in deposit rates because the calculation is based on the incremental rate, unlike base rate, in which case it is based on average rates. Bankers said that they were mindful of a fall in rates on short-term papers or commercial papers post the government’s currency curbs because of abundant liquidity in the banking system.

“On the corporate credit side, we only have working capital demand. And if we don’t cut rates, most of customers may shift to the CP market,” said a senior official with a private sector bank. Rates on manufacturing companies’ CPs maturing in three months have fallen 40-50 basis points since the government’s announcement. Currently, the rates quoted on these papers are in the range of 6.15-6.25 per cent. SBI’s marginal cost of funds-based lending rates is in the range of 8.65-9.05 per cent.

To be fair, the gap between CP rates and loan rates is already wide and analysts don’t expect banks to reduce rates to the extent of filling this gap. This is because bad loans are expected to remain high and this, together with a sharp reduction in loan rates, may impact profitability.

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