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| Banks see rates rising 100 bps in second half |
| BS Reporter / Kolkata Jul 14, 2009, 00:28 IST |
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A day after Union Finance Minister Pranab Mukherjee said the government’s huge borrowing programme would not push up interest rates, bankers remain unconvinced.
Government-owned State Bank of India, the country's largest lender, sees interest rates rising by up to 100 basis points in six months if cash conditions tighten. It has company in UCO Bank, which foresees a rise of as much as 150 basis points in its prime lending rate (PLR), IDBI Bank, and others.
Banks are flush with cash but anticipate pressure after the government last week announced record borrowings of Rs 4.51 lakh crore for the current financial year, about Rs 89,000 crore more than what was forecast in February’s Interim Budget. The Reserve Bank of India and the finance ministry are scheduled to meet in New Delhi on Friday to draw up a calendar and the modalities for this borrowing.
“Last fiscal, RBI was prudent in debt management and this year also we will ensure that the private sector can get loan at affordable rates and not pay higher interest,” Mukherjee said on Sunday.
Last month, SBI reduced its benchmark PLR by 50 basis points to 11.75 per cent. Commercial bank lending rates have fallen 200 basis points since last October, after the central bank slashed its main lending rate by 425 basis points to revive a slowing economy. Bank loan growth slowed to 15 per cent in June from 30 per cent in 2007-08, but is expected to pick up in the coming months as economic activity revives.
“There is a possibility of interest rates going up by 25 to 100 basis points if liquidity is not managed well when the busy season picks up," SBI Chairman O P Bhatt said on the sidelines of a banking conclave in Kolkata. “Inflation is going up, government borrowing will increase and liquidity in the system will come down.”
He does not see much scope for reduction in rates, as the bank’s net interest margin has come down from 3.16 per cent in December 2008 to 2.32 per cent. “We would like to maintain 2.50-3.00 per cent by the end of this financial year,” he said.
Echoing Bhatt, UCO Bank Chairman & Managing Director S K Goel said if government borrowing and higher credit demand squeezed liquidity, interest rates could rise to 14 per cent in the third quarter. The bank’s current PLR is 12.5 per cent.
Goel’s counterpart in IDBI Bank, Yogesh Agarwal, said recently that interest rates had softened in the past few months, but that would change. “The situation is now going to turn. When corporate demand picks up in the third quarter, one should be ready for higher interest rates.”
Allahabad Bank CMD K R Kamath said he expected RBI to ensure ample liquidity and the government borrowing to happen in a non-disruptive manner. “If these two do not happen, interest rates might go up,” he said.
United Bank of India CMD S C Gupta said, if liquidity was not managed prudently, interest rates might go up in the fourth quarter when credit demand was expected to pick up.
Bank of India Chief Financial Officer V K R Agarwal agreed. “With deficient rainfall, the risk of rise in the consumer price index is real. When CPI (consumer price index) moves up (due to energy and food prices), consumers (depositors) may expect banks to protect their returns on deposits. In such circumstances, banks may have to increase deposit rates.”
 RBI was prudent in debt management last fiscal, too. This year also, we will ensure that the private sector gets loan at affordable rates and does not pay higher interest rate Pranab Mukherjee Finance Minister |
 There is a possibility of interest rates going up by 25 to 100 basis points if liquidity is not managed well when the busy season picks up O P Bhatt SBI Chairman |
 If govt borrowing and higher credit demand squeezes liquidity, interest rates could rise to 14% (current PLR 12.5%) in the third quarter S K Goel CMD, UCO Bank |
 The situation is now going to turn. When corporate demand picks up in the third quarter, one should be ready for higher interest rates Yogesh Agarwal,CMD, IDBI Bank |
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