BackChidambaram pushes banks to cut rates; Bank of India obliges
Bank of India to cut rate to 10%; SBI says it won’t be able to cut rates unless cash reserve ratio is pared
Premium(Indranil Bhoumik/Mint)
New Delhi/Mumbai: Finance minister P. Chidambaram on Wednesday asked state-run banks to lower their minimum lending rate and issue more loans to stimulate economic growth.
Soon after, Bank of India said it would cut its base rate to 10% from 10.25% with effect from 8 July.
This is the first rate cut by a state-owned bank after the Reserve Bank of India (RBI) kept its policy rates unchanged at its mid-quarter monetary policy review on 17 June.
It isn’t known if other state-owned banks will follow. In their meeting with Chidambaram, bankers pointed out the limited room available to them to cut base rates because of the increased provisioning requirements announced by India’s central bank and the high cost of funds, which would impact margins by around one percentage point. With banks unable to reduce deposit rates, the room to cut lending rates is low.
“I have impressed upon the banks the need to cut base rates. While State Bank of India’s base rate is 9.7%, the average for other banks is around 10.2-10.25%. RBI has cut policy rates by 125 basis points. Some part of this must be passed on to the borrowers," Chidambaram said.
One basis point is one-hundredth of a percentage point.
“Banks have assured me that they will review their base rate in July. Each bank will take an appropriate decision," the minister said.
SBI chairman Pratip Chaudhuri told reporters that his bank will not be able to cut rates unless the cash reserve ratio is pared. He added that the bank’s base rate is lowest among banks.
M. Narendra, chairman and managing director of Indian Overseas Bank (IOB), said banks will have to look at ways to reduce deposit rates for cutting lending rates. “First, banks will have to reduce deposit rates to ease pressure on margins before cutting the base rate. As inflation comes down, there will be more scope to reduce deposit rates," he said.
In his review of the performance of state-owned banks, Chidambaram asked them to look at ways of improving credit and deposit growth. While deposit growth was up marginally in 2012-13 at 14.9% from 14.1% in 2011-12, credit growth fell sharply to 15.26% from 17.76% in 2012-13.
Sectors such as agriculture, small and medium enterprises, retail, residential real estate and roads are seeing stronger credit demand, the minister said, adding that the picture will be clearer by the end of the second quarter ending September.
Chidambaram also asked banks to keep a close watch on their top 30 performing and non-performing accounts to improve their balance sheets and asset quality.
There has been some improvement in bad loans in the quarter ended March compared with the previous quarter, he said.
In the quarter ended March, gross bad loans grew to ₹ 1.79 trillion, an expansion of 0.5% from the preceding three months. In the quarter ended December, such loans had risen by 7.16% from the preceding quarter.
Speaking on the issue of capital, Chidambaram said all public sector banks are meeting Basel III requirements for capitalization, though four of them—IOB, IDBI Bank Ltd, Bank of Maharashtra and Dena Bank—have tier-1 capital below 8%. The government will take steps to ensure that these banks have 8% tier-1 capital by the end of the current fiscal year, Chidambaram said.
According to global Basel III norms, tier-1 capital, consisting of core capital and reserves, should be 7%.
Besides capital infusion from the government out of the ₹ 14,000 crore allocated in the budget, these banks will plough back profits and look at raising funds from financial institutions and through sale of bonds.
“I don’t expect banks to cut rates but some adjustments could be made," said an analyst with a domestic brokerage who did not want to be named. “Of course, under pressure (from the minister) some banks may buckle in, but I don’t see a big change."
The Bankex on the BSE shed 2.33% to 12,969.26 points, while Sensex was down 1.47% to 19,177.76 points.
PTI contributed to this story.
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