Mumbai: In what could be the last round of rate cuts in this cycle, public sector banks are expected to pare their loan rates next week after their meeting with finance minister Pranab Mukherjee.
At least three senior public sector bankers, who spoke on condition of anonymity, told Mint they would cut their loan rates as the rates on deposits have already come down. All three of them indicated an around 50-75 basis points cut in loan rates.
One basis point is one hundredth of a percentage point.
Currently, Punjab National Bank (PNB) has the lowest prime lending rate (PLR) of 11%. State Bank of India, the country’s largest lender, has a PLR of 12.25% and most of the other public sector banks’ PLR ranges between 12% and 12.50%. In case of private banks, the PLR ranges between 14% and 16%. Banks are expected to offer loans at PLR to their best borrowers.
More cuts: Since their last meeting with finance minister Pranab Mukherjee in February, banks have pared loan as well as deposit rates. Harikrishna Katragadda / Mint
It is not known whether PNB, too, will cut its PLR and bring it down to 10.5%, the lowest public sector banks’ PLR has been since 2004. At that point of time, the yield on 10-year government bond, a barometer of the market rate, was moving in the range of 5.5% and 6%.Currently, the yield on 10-year benchmark paper is 6.67%.
In 2004, the Reserve Bank of India’s (RBI) policy rate was 6%. Since September 2008 in the wake of the collapse of Wall Street investment bank Lehman Brothers Holdings Inc. that plunged the global financial system into an unprecedented liquidity crunch, RBI has brought down its policy rate from 9% to 3.25%, lower than the administered bank savings rate of 3.5%.
Since the last meeting with the finance minister, in February, banks have pared their loan rates by 100-150 basis points and deposit rates even more sharply.
According to people in the finance ministry, lowering loan rates will spur growth, but in private, bankers confide they don’t have much room to go for a sharp cut in loan rates. If indeed the ministry “forces” them to cut rates drastically, their profitability will be hit as the net interest margin, or the difference between the cost of funds and their earnings on loans, will shrink.
Economists do not see too much scope for a loan rate cut as, according to them, the wholesale price-based inflation, which is now 0.61%, will rise as oil prices have started to go up and petroleum minister Murli Deora has recently hinted at deregulation of domestic oil prices.
There are also signs of a global recovery and India’s gross domestic product for the March quarter grew at 5.8%, against economists’ expectations of 5%.
In a research note dated 29 May, Nomura Financial Advisory and Securities Ltd’s India economist Sonal Varma said “the rate cutting cycle has ended”.
“... Headwinds still remain in the form of a weak global economy, but we believe that the initial conditions for a gradual domestic-demand led recovery are now in place... We are now pulling out our last 25 basis points policy rate cut and now judge that the rate-cutting cycle has ended,” Varma said.
According to Goldman Sachs India economist Tushar Poddar, the policy rates are near all time low now, but banks have not fully passed on the low rates to their customers.
“With the lags in policy rates on the one hand, bank lending rates and economic activity on the other, further cuts in policy rates may impact demand only in FY11, when demand and inflationary pressures will likely be picking up,” Poddar said in a 1 June report.
Given a choice, bankers are not willing to cut their PLR as most of the loans are disbursed below PLR in any case.
“Whenever we cut PLR, all loans linked to PLR are repriced immediately,” said a chairman of a public sector bank based in southern India on condition of anonymity. “The negotiation part on sub-PLR loans is the biggest challenge for us, not the rate cut. I don’t have room for more than 50-75 basis points cut from the present level,” he added.
Banks give small agricultural loans and export loans at below PLR. Besides, big corporate customers, too, access bank loans at less than the prime loan rates.
Cash-starved public sector banks raised their one-year deposit rates to 10.5% in September. Since then, the rates have gone down to 7.5-8.5%, but these rates are applicable to new deposits and banks are required to pay the old rates to the existing deposits till they mature.
“It could be the last of the rate cuts for us in immediate term. The cost of deposits will go up if the economy revives and liquidity will again be tight. It all depends how RBI provides liquidity,” said a Mumbai-based bank chairman, who declined to be identified.
Some economists, however, expect the soft rate regime to continue till the second half of fiscal 2011.
In a research noted dated 1 June, Banc of America Securities-Merrill Lynch economist Indranil Sen Gupta pointed out that the current gap between the 10-year bond yield and the PLRs of banks, at about 550 basis points, is too high to sustain and should come down
“This should protect our soft lending rate regime until second half of FY11,” Sen Gupta said in his report.