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Co-op banks may cut rates by 100 bps this month

K Ram Kumar

Co-operative banks, especially the strong ones, are expected to slash the interest payable on term deposits by 50-100 basis points this month.

These banks refrained from deposit rate cuts after the Reserve Bank of India brought down the minimum lending rate by 100 basis points to 12 per cent on March 2.

They left the deposit rates unchanged with a view to mobilise deposits in the last 29 days of the financial year.

The RBI pared the MLR to enable the co-operative banks to be competitive on the advances front vis-a-vis the commercial banks.

Majority of the commercial banks have a prime lending rate ranging between 11-12 per cent. The proposed deposit rate reduction by the banks is to protect their net interest margins (spreads).

"Only the strong co-operative banks will be able to cut the deposit rates. The weak banks, however, will have no option but to continue to offer two per cent higher interest rate over the industry average of around 10 per cent in order to retain/attract deposits," said R Chandrasekaran, managing director, Maharashtra State Co-operative Bank.

He pointed out that the cost of funds was high for co-operative banks as almost 80 per cent of their resources were in the form of fixed deposits (thanks to the higher interest rates offered).

Their access to cheap sources of funds like savings/current account deposits as also float funds was limited. High cost of deposits has resulted in lending rates being upwards of 15 per cent.

"Slashing the deposits rates on the back of reduction in MLR would not have made much of a difference to the average cost of funds for the financial year. In fact, by leaving the deposit rates unchanged, the banks have garnered more deposits," said H Krishna Karanth, general manager, New India Co-op Bank Ltd.

New India Co-op Bank Ltd may pare deposit rates by 50 basis points this month, he added. Among others, big co-operative banks such as the Janakalyan Sahakari Bank, Mandvi Co-operative Bank and Shamrao Vithal Co-operative Bank will be reviewing their deposit rates later this month.

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