Banks flush with cash, likely to cut rates soon

Hyderabad/Mumbai: State Bank of India (SBI), the largest public sector lender in the country, on Friday said it has received nearly Rs 40,000 crore as deposits in the last two days following the government’s decision to demonetise Rs 500 and Rs 1,000 notes.

“What I do in a month, I've done in a day," said SBI chairman Arundhati Bhattacharya, giving out the details of the influx of low-cost deposits in current accounts and savings accounts.

She further said that the strong growth in deposits would bring down the cost of capital for banks. Along with it, the resulting disinflationary environment would pave the way for lending rates to fall in coming months.

According to industry sources, all banks put together must have collected deposits worth over Rs 2 lakh crore in the last two days.

Demonetised notes in circulation are worth over Rs 14 lakh crore. If people are holding this entire sum legally, then banks will get back Rs 14 lakh crore by March 31, 2017 — the final deadline set by the government.

However, if banks and post offices don’t get this amount, the balance would be presumed to be unaccounted money which got flushed out of the system.

Under the new interest rate mechanism — marginal cost of funds based lending rate (MCLR) — devised by RBI, lenders must quickly reflect deposit rates in their lending rates. So the low lending rate is just a matter of time.

Apart from this, banks cannot keep the huge cache of cash ideal. They will have to make the cash work. So they have to find borrowers, by cutting lending rate.

Lower lending costs will help companies to better their profitability and in turn improve investment appetite.

The bank has also exchanged currency notes worth Rs 1,666 crore in last two days.