Mumbai: Turning against the tide, the Delhi-based Punjab National Bank, or PNB, India’s second largest public sector bank by assets, has decided to cut its lending rates. The bank will cut its rate for retail loans by 0.5 percentage point on Thursday.
“We are passing on the benefit of a half percentage point CRR (cash reserve ratio) cut to our retail consumers,” chairman and managing director K.C. Chakrabarty said on Wednesday before the Reserve Bank of India, or RBI, cut the CRR by a further 1 percentage point to 6.5%.
Chakrabarty said all existing and new retail customers of the bank will get the benefit of the rate cut. The bank has a retail portfolio of around Rs15,000 crore.
Following this, home loans and car loans of the bank will get cheaper. Currently, PNB charges 10.5-11% on home loans. This will come down by 0.5 percentage point. “We are cutting the loan rate to bring cheers to bank customers in the festival season,” said Chakrabarty.
Chakrabarty said PNB does not have any liquidity problem and the 0.5 percentage point cut in retail loan rate will not put pressure on its margin or the spread between the bank’s cost of funds and the money it earns by giving loans.
RBI has cut banks’ CRR, funds that commercial banks need to keep with the central bank, to release more money into the banking system. This will help banks in manage liquidity as well as bring down the cost of funds as banks do not earn any interest for the money kept with RBI.
By bringing down CRR from 9% to 6.5%, RBI has freed non-interest bearing bank funds and thus brought down the cost of funds. PNB wants to pass on this benefit to its consumers. There is, however, no change in its prime lending rate or the rate at which the bank is expected to lend to its prime borrowers. It remains at 14%. Till a few months ago, 80% of borrowers used to raise bank loans below the prime lending rate, but now the trend has changed, with money becoming dearer and the system suffering from a crunch.
Bank credit in the first half of the fiscal year that began in April grew at about 26%, above RBI’s projection of 22%. The central bank had earlier this year raised interest rates and CRR to fight the rising inflation, which hit its 16-year high in August.
With global commodity prices coming down sharply, the inflation outlook is turning benign but no bank has cut loan rates so far. Instead, they are raising their deposit rates to mop up money in a liquidity starved system.