Banks slash lending rates by 75 bps

The big state-owned banks on Thursday gave in to the finance minister’s demand for lower lending rates. Several public sector lenders, led by
the country’s biggest lender State Bank of India, have lowered their prime lending rates, the benchmark interest rate, to which all loans are linked. The rate cuts have been around 75 basis points (bps).

The move is expected to finally bring down deposit and lending rates, including home loan rates, across banks. Loans to business would also get cheaper, though the once popular sub-PLR rates to corporates, may still take a long time to return.

Banks, which are in a position to cut their deposit rates along with the lending rates, would be better placed to preserve their profit margins. The release of liquidity through aggressive cuts in the cash reserve ratio that banks maintain with RBI, will also enable the banking industry to earn over Rs 14,000 crore a year by deploying the funds, which would have otherwise earned no interest.

Other banks, which announced rate cuts on Thursday, were Bank of Baroda, Allahabad Bank, Central Bank of India, Oriental Bank of Commerce and Corporation Bank. All of them reduced lending rates by 75 bps to 13.25% with effect from November 10.

Dena Bank cut its PLR to 13.5% from 14.25% and, among foreign banks, Citibank lowered its benchmark lending rates by 50 bps to 15% with immediate effect. Syndicate Bank also revised its PLR by 75 bps to 13.25% from November 4. However, the rate cuts were largely confined to the public sector banks (with the exception of Citibank).

The second-largest bank ICICI and HDFC Bank said they were still maintaining a wait-and-watch stance. Significantly, home loan leader HDFC is yet to revise its rates, since the firm’s borrowing costs have not come down. Besides, the National Housing Bank, which provides refinance to home finance companies, had hiked its refinance rates by 75 bps a month ago.

SBI cut its PLR by 75 bps with effect from November 10 and lowered deposit rates by 25 to 50 bps across all maturities effective December 1. But, SBI chairman OP Bhatt expressed concerns over liquidity conditions. Speaking at a seminar, Mr Bhatt said, “Liquidity is a major issue, short term as well as long term”, while adding that he continued to be bullish on the Indian economy.

Banking analysts said SBI’s decision to lower deposits rates from December 1 could be a reflection of its liquidity concerns. Although the bank has not specifically mentioned when the return on the 1,000-day deposit scheme would be revised, sources said it would be reduced to 10% from 10.5%. Mr Bhatt said SBI deposits are growing at Rs 1,000 crore a day.

Speaking at a seminar organised jointly by FICCI and IBA, Mr Bhatt said banks would need more capital because assets are growing at a higher rate and more capital brings in confidence and stability. He said SBI will have to raise tier II capital in the range of Rs 500-1,000 crore for the year to meet its domestic and overseas operations.

Mr Bhatt said: “Although there is ample liquidity in the system, credit normally picks up during this time of the year, with the busy season. Also government borrowing is higher during this time of the year. Simultaneously, FDI and FII inflows have dried up. All these things put together are likely to put some pressure on liquidity next month.”

Another concern voiced by the SBI chief was the possible rise in bad loans, following a downturn and sharp growth in assets over the past 4-5 years. He said NPAs will rise across sectors, including the diamond industry.

“Some companies will find the going difficult and banks will have to be more mindful of this,” he said. Speaking at the seminar, Sanjay Nayar, CEO, Citi, South Asia said, “Uncertainty is going to be there for some more time. We are not at the end of the crisis.”

Source: EconomicTimes