Saddled with excess liquidity, some banks have given in to pressure from companies and have started contracting three- to six-month loans at interest rates up to 100 basis points lower than a month ago.
However, for loans of longer maturity, banks are unwilling to cut rates, despite companies pushing hard.
In some cases, loans of one-year tenor too are being given at reduced rates, though banks insist, wherever possible, on inclusion of a clause that would allow them to reset the interest charged every three months.
The reset clause is meant to protect banks' margins when the credit demand gains momentum and excess liquidity dries up.
As a result, loans of up to one year are now being given at 9-9.5 per cent, against 10-10.5 per cent till a month earlier, though the rates are higher than the 7-8 per cent charged nearly a year ago.
Since the beginning of the year, the Reserve Bank of India has followed a tight monetary policy to control inflation, which had crossed the 6 per cent mark -- way above the government's target of 4-4.5 per cent. (It has fallen to 4.27 per cent for the week ended 7 July.)
This had caused interest rates to move up. In the last one year, the prime lending rate of banks has shot up by 250-300 basis points to 12.75-13.25 per cent.
However, low credit offtake, coupled with strong growth in deposits during the April-June quarter, has resulted in banks sitting on excess liquidity.
In June, bank deposits went up by Rs 94,000 crore (Rs 940 billion), which, bankers said, was far in excess of the growth in credit. The loan portfolio of banks grew by Rs 27,844 crore (Rs 278.44 billion) during the month.
Since most new deposits have been contracted at 9-9.5 per cent interest, it had become essential for banks to crank up credit growth to service these deposits.
