State Bank of India, the country’s largest lender, today announced a 50 basis point reduction in its benchmark prime lending rate (BPLR) to 11.75 per cent.

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The rate cut would be effective from Monday, the bank said in a statement this evening. With the latest reduction, SBI has lowered its BPLR by 200 basis points since last November when the Reserve Bank of India signaled a soft interest rate regime. In contrast, players such as Punjab National Bank have lowered their BPLR by 300 basis points.

SBI’s move comes within a fortnight Finance Minister Pranab Mukherjee asked public sector banks to lower interest rates. Other players such as Union Bank of India and United Bank of India have also announced rate cuts. United Bank also announced today that it would reduce the BPLR by 25 basis points to 12 per cent with effect from July 1.

By staggering the rate cut decision to the end of the first quarter of the current financial year, banks would be able to show a healthy net interest margin for April-June, an executive with a private bank said.

While SBI had lowered deposit rates on four occasions during the first quarter of the current financial year, it had not reduced the BPLR fearing an adverse impact on the net interest margin (NIM). The BPLR was last lowered in January and since then SBI had been lowering lending rates on certain products such as home and auto loans and loans to small and medium enterprises.

The public sector players is seeing rigidity in its cost of funds as it had mopped up retail deposits by offering rates of 10.5 per a year for 1,000 days. While it is unable to reset interest rates on these deposits up to October 2011, its earnings from advances would drop immediately after the rate cut. As a result, SBI’s NIM fell by 14 basis points to 2.93 per cent at the end of March 2009, as against 3.07 per cent a year ago. During the fourth quarter, NIM fell by 22 basis points as the bank had raised around Rs 1,000 crore a day through retail deposits in the third quarter and the early part of the fourth quarter.

But bank executives said that the impact of the BPLR reduction on NIM would be 5-6 basis points. “The effect on NIM is limited as the bank has aggressively reduced its deposit rates,” said a senior SBI executive.

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