Banks set to lower deposit rates

After facing a margin squeeze for nearly three quarters with the rise in interest expenditure outpacing the increase in interest income, banks are now facing pressure to reduce deposit rates.

Union Bank has taken the lead irrespective of competitive pressures, the bank has cut rates on one-year deposits to 8.5 per cent from 9 per cent, which most banks are offering on one- and two-year deposits.

Union Bank of India’s interest income grew 27 per cent during the quarter from a year earlier but its interest expenditure rose faster at 38 per cent. As a result, the bank’s net interest margin (NIM) in the second quarter fell to 2.56 per cent, from 2.76 per cent a year ago.

Media reports that other banks are also expected to follow suit. Banks like IDBI, ICICI Bank, HDFC Bank and Vijaya Bank have reported a sharper rise in interest expenditure than interest income in July-September 2007 from a year earlier. ICICI Bank’s interest income, for instance, grew 37 per cent while its interest expenditure rose by 47 per cent.

Most banks are waiting for the mid-term review of the Reserve Bank of India’s monetary policy, due on October 30, before they take action.