Mumbai: State Bank of India appears to have taken the lead in trying to convince key public sector banks to fall in line with a finance ministry suggestion by convening a secret meeting on?Saturday?of?four?bank heads.
The meeting, which could open these large banks to charges they are acting as a cartel, was called by SBI chairman O.P. Bhatt to discuss a cut in interest rates as suggested by finance minister P. Chidambaram recently.
Mint has learnt that none of the chief executives made any formal commitments to reducing interest rates. The meeting is significant because it comes soon after the Indian Banks’ Association (IBA), the country’s premier bankers’ body, decided the decision on interest rates would be made by the boards of individual banks.
SBI’s O.P. Bhatt
The meeting was attended by M.B.N. Rao, chairman and managing director (CMD) of Canara Bank; K.C. Chakrabarty, CMD of Punjab National Bank; Anil K. Khandelwal, CMD of Bank of Baroda and T.S. Narayanasami, CMD of Bank of India. Rao is also the chairman of IBA.
Both State Bank of India and Canara Bank have already cut their prime lending rates (PLR) by 25 basis points to 12.5% and 13%, respectively, effective 16 February.
Prime lending rate is a benchmark rate and the actual interest rate charged by Indian banks depends on the rating of borrowers. Banks have their own internal credit rating system for companies that wish to borrow money. Companies with high ratings can avail bank loans at rates lower than PLR while firms with low ratings borrow at higher rates. Consumer loans, too, normally attract rates higher than PLR. For public sector banks, which account for close to 70% of Indian banking industry, PLR ranges between 12.5% and 13.5%. Private banks have higher prime lending rates.
At the meeting, Bhatt impressed upon CEOs of the four banks the need for cutting rates both for loan advances as well as deposits even though, analysts say, such a move taken by select banks might amount of cartelization. In a free market, bankers are expected to fix the loan and deposit rates taking into consideration their assets and liabilities.
Khandelwal and Chakrabarty declined to comment on the outcome of the meeting. Rao, too, did not comment on the meeting but said banks should take a relook at their lending and deposit rates. He also did not rule out another round of rate cut by Canara Bank. Bhatt was not immediately available for comment.
People familiar with the development said none of the bankers who attended the meeting gave any commitment to bring down their lending and deposit rates. Bhatt, they said, has suggested public sector banks should not fight among themselves for corporate deposits. This competition results in an increase in interest rates paid on such deposits, and, consequently, on the rates banks charge borrowers. Bhatt, the people added, was even ready to share the list of corporations whose deposits kept with SBI would soon mature.
Indian banks normally pay higher rates to corporations for their bulk deposits than retail depositors. The fight for such deposits intensifies as the financial year draws to a close in March. Banks aggressively pursue bulk deposits around this time as they have yearly targets to fulfil.
Chidambaram has been asking banks to cut their rates in an attempt to boost growth. Reserve Bank of India governor Y.V. Reddy left the policy rate untouched at the Indian central bank’s quarterly review of monetary policy in January but said banks could afford to cut rates if they wished to because they are profitable and enjoy a high net interest margin, the difference between interest earned on assets and spent on deposits.
Industry analysts say bankers are keeping the rates “artificially high” out of competitive compulsion. “When there is no demand for loans, bankers should cut both loan rates as well as deposit rates,” said a banking analyst with a foreign brokerage in Mumbai who did not wish to be named.
Bank deposits this year have grown by Rs4.81 trillion or 18.4% against 15.1% in the comparable period last year but credit has dropped to 14.4% against 19.3%. Year-on-year credit growth has been 22.8% so far, sharply down from 29.7% and much below the RBI’s projected target of 25%. The credit deposit ratio, which was ruling at more than 90% last year around this time has dropped to less than 50%, a senior banker said. This means, for every Rs100 worth of deposits mobilized, bankers are lending less than Rs50 now.
“Unless banks rates and credit pick up, the economy’s growth momentum cannot be sustained,” said the same banker who asked not to be identified.