Banks to slash deposit, interest loan rates by 0.50-0.75%

The public sector banks on Tuesday have announced to cut down the interest rate on major loans by 50 to 75 basis points (0.50-0.75%). The banks announced it after concluding the meeting of the heads of the banks with Union Finance Minister P Chidambaram, who assured the bank chiefs to take some measurable steps to help banks in reducing bad loans on their books.

After concluding the meeting of top officials of the banks with Chidambaram, some public sector banks like State Bank of India (SBI), Bank of Baroda (BoB), Central Bank of India (CBI) and UCO bank have announced to cut down their Prime Lending Rate (PLR), the rate at which banks lend to their most credit-worthy customers by 50 to 75 basis points (bps).

This step of banks came in the response of Reserve Bank of India’s (RBI) move when the apex banks on October 31, 2008 had deducted the Cash Reserve Ratio (CRR), the percentage of cash amount banks need to deposit with the master bank; Statutory Liquidity Ratio (SLR), the minimum quantum of amount banks need to maintain in RBI deposits in the form of cash, gold or securities; and Repo Rate, the short term lending rate at which the Central bank lends debt to banks for short term periods by a range of 50 to 100 basis point.

However, the banks have responded four days later but analysts believe that this move of banks would be emerged in the form of major long term loans. Addressing the media after the meet, the Finance Minister said public sector banks have assured him to deliver credit at an appropriate price to creditworthy borrower.

He, however, denied any directives given to banks in bringing down the interest rate on loan. He also informed that banks have also notified him to cut down the deposit rates by 50 bps to avoid the dilution of their profit.

Besides, SBI, CBI, BoB and UCO bank, other public sector banks including Indian Bank has also announced cut down in PLR rate soon by 50 to 75 bps, while Punjab National Bank (PNB) has already reduced the PLR by 50 bps to 13.50% last week.

The private sector banks which play a major role in automobile and home loans have not so far indicated any reduction on their behalf, and are following the ‘wait and watch’ policy, as an official of an private sector bank informed. Meanwhile, the Finance Secretary Arun Ramanathan has convened a meeting today with heads of foreign and private banks, as per sources.

On the issue of economic condition, liquidity, interest rate and industrial growth, Chidambaram said that government was continuously monitoring the fiscal and monetary policy and keep on consulting with the industry body and Indian Banks Association (IBA). “Government has asked public sector banks to submit their reports at every fortnightly on the sectoral flow of credit,” said FM by adding that RBI has taken initial steps to ensure adequate liquidity flow in the system.

The government has also enhanced the credit guarantee (the facility to borrow without security) by 100% to Rs 1 crore for Small and Medium Enterprises (SMEs) while Small Industries Development Bank of India (SIDBI) has asked RBI to lend an additional Rs. 10,000 crore.

The banks have also asked the Central bank to relax bad loan norms of real estate loans that have been restructured on August 2008.

National Housing Bank, the mortgage market regulator of India that refinance home loan companies to disburse home loan, has also asked RBI to borrow an additional debt of Rs. 10,000 crore, informed Chidambaram.

On the issue of bad loan guidelines for infrastructure sector, Chidambaram said that RBI would review this guideline this week and would try to eradicate the problem facing clause that firms were facing.