Mumbai: Heeding the finance minster’s call for an interest rate cut to boost the slowing credit growth, large public sector banks, including the country’s biggest lender State Bank of India, went for a surprise second round of rate cuts ranging between 25 and 50 basis points.
State Bank of India, which last week convened a meet of CEOs of large public sector banks to root for a revision in interest rates, cut its prime lending rate for the second time by 25 basis points, or 0.25%, to 12.25% from 12.50%, with effect from February 27.
Rate revision: The move comes days after a meeting of banks called by SBI chief O.P. Bhatt to build a consensus on interest rates.
Canara Bank, the country’s third largest public sector bank, also cut its interest rate by 25 basis points to 12.75% with effect from 25 February. Both banks had cut their interest rates by 25 basis points each on 16 February. With Wednesday’s rate cut, both have slashed their interest rates by 50 basis points each.
Bank of India and Union Bank of India, two other large public sector banks, on the other hand, decided to go with a sharp 50 basis points cut at one go and revised their prime lending rates downwards to 12.75%, both effective 21 February.
Among the large public sector banks, Punjab National Bank and Bank of Baroda are yet to cut their prime lending rates. CEOs of these two banks were not immediately available for comments. Bank of Baroda chairman and managing director A.K. Khandelwal has recently said the asset liability committee of the bank will meet soon to review the situation.
The prime lending rate is a benchmark rate and the actual interest rate charged by banks depends on the rating of borrowers. Banks have their own internal credit rating system for firms that wish to borrow money. Companies with high ratings can get bank loans at rates lower than the prime lending rate while firms with low ratings borrow at higher rates. For public sector banks, which account for close to 70% of the Indian banking industry, the rate ranges between 12.5% and 13.5%. Private banks have higher prime lending rates.
Union Bank on Wednesday also said the decrease will impact its advances with floating interest rate structure. The bank cut the interest rates on its term deposits for three years and above by 50 basis points from 8.75% to 8.25%.
Relatively smaller public sector banks such as Syndicate Bank, Bank of Maharashtra and Kolkata-based United Bank of India have already reduced their interest rates.
Union Bank of India chairman M.V. Nair said the bank’s board, which met in Lucknow on Wednesday, has decided to cut the interest rate to pass on the benefits of a cheaper cost of funds to the customer.
“Last year around this time, one-year term deposit offered 10.5-11%. interest rates. This year, the rate has come down to around 9%. So, the cost of funds has come down by 1.5%. We have decided to pass on the benefit to our customers,” the Union Bank chairman said.
An official from State Bank of India who did not wish to be named said the bank went for a second round of interest rate cut because of a softening interest rate scenario worldwide.
The official did not confirm or deny any plans to cut its deposit rate but said “everything is under scanner.”
“Through the interest rate cut, we thought we could give respite to a large spectrum of our customers,” the State Bank official said.
The sudden interest rate cut is significant as the management committee of the Indian Banks’ Association (IBA), at its recent meeting, tried to convince top bankers for a rate cut after finance minister P. Chidambaram asked them to pare their rates and increase funds flow to housing and consumer loans. H.N. Sinor, the chief executive of IBA, had said some banks were reluctant to cut their rates as the rates are already at the “lower level”.
On 18 February, Mint exclusively reported that following the IBA meeting, State Bank chairman O.P. Bhatt called for a top bankers’ meeting at the bank’s headquarters in Mumbai, to build consensus on a possible rate cut. 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.