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SBI, Union Bank increase prime lending rate by 50 basis points

SBI, Union Bank increase prime lending rate by 50 basis points
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First Published: Fri, Jun 27 2008. 12 42 AM IST

O.P. Bhatt-led State Bank of India on Thursday hiked its PLR to 12.75% (Photo by: Ashesh Shah / Mint)
O.P. Bhatt-led State Bank of India on Thursday hiked its PLR to 12.75% (Photo by: Ashesh Shah / Mint)
Updated: Fri, Jun 27 2008. 12 42 AM IST
Mumbai: The country’s largest lender, State Bank of India (SBI), became the first public sector bank to hike its prime lending rate (PLR), or the rate at which it gives loans to its preferred customers, by 50 basis points to 12.75%, after the central bank initiated harsh monetary measures to contain a 13-year high inflation.
In an announcement at the Bombay Stock Exchange, the public lender said it “restores its benchmark prime lending rate...to the rate prevailing in January 2008”, effective 27 June.
O.P. Bhatt-led State Bank of India on Thursday hiked its PLR to 12.75% (Photo by: Ashesh Shah / Mint)
The language used by the bank stems from what SBI and other public sector banks were forced to do when in February—slash their interest rates by a total of 50 basis points— finance minister P. Chidam-baram called for a boost in the slowing credit demand.
On Thursday, another public sector Union Bank of India quickly followed SBI’s lead and also said it “restored” its PLR by 50 basis points to 13.25% effective 1 July. One basis point is a hundredth of a percentage point.
K.C. Chakrabarty, chairman of Punjab National Bank, and T.S. Narayanasami, chairman of Bank of India, had said on Wednesday that their banks may raise their PLRs by 50 basis points too.
“All the banks wait for SBI to take a lead. Now that SBI has hiked its rates, all the banks will easily follow the leader. Afterall, they already got a strong signal from RBI (Reserve Bank of India) to hike their rates,” said an analyst with a Mumbai-based domestic brokerage, who didn’t want to be named.
RBI on Tuesday raised its short-term interest rate and the cash reserve that banks are required to keep with it, by 50 basis points each. Following Tuesday’s hike, the central bank has so far this year raised the repo rate by 75 basis points to 8.50% and the cash reserve ratio by 125 basis points to 8.75%.
According to Kashyap Jhaveri, an analyst with Emkay Share and Stock Brokers Ltd, other banks that are yet to raise their rates should hike them now.
“If they want to protect their net interest margins (NIMs), they have to hike the rates,” Jhaveri said. An NIM is the measure of a bank’s returns in its core business of borrowing and lending.
In view of high bad debts in the farm equipment sector, SBI had put on hold financing tractors in May, but had to retract the decision after the finance minister ordered the bank to do so. The farm equipment loan ban had come at a time when Chidambaram had announced an ambitious farm debt waiver of about Rs72,000 crore.
At the time of rolling back the decision, SBI had said its circular was “misunderstood” by the media.
Earlier on Thursday, M.B.N. Rao, chairman of Canara Bank and also the chairman of the Indian Banks’ Association, the country’s apex banking lobby, had said that banks may not have to hike their interest rates at par with the RBI hike.
“A 50 basis points in repo need not get translated into a 50 basis points increase in cost of borrowings to customers. Because banks need to see to what extent each bank will be impacted by the additional cost and to what extent it could be spread,” he said while inaugurating Canara Bank’s 2,962nd branch in Dharavi, Mumbai.
Along with raising its PLR, Union Bank also raised its interest rates on term deposits by 0.25% to 1% across different maturities.
So far some private sector banks such as Yes Bank Ltd, HDFC Bank Ltd, IndusInd Bank Ltd have hiked their lending rates.
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First Published: Fri, Jun 27 2008. 12 42 AM IST
More Topics: SBI | Union Bank | PLR | Interest rates | CRR |