Bankers sing FM tune, agree to cut interest rates

BoI reduces base rate 25 bps; others to follow suit

 

After resisting for several months, despite the central bank’s prodding, banks have finally signalled they are willing to cut their base rate — the benchmark lending rate to which all the loan rates are linked. The change of heart happened after Finance Minister P Chidambaram held a meeting with chief executives of public-sector banks in New Delhi on Wednesday.

Though the meeting was meant to review banks’ first-quarter performance, the finance minister made it clear at a press conference that lenders had the scope to cut interest rate.

“I impressed upon the banks... that RBI had cut rate by 125 basis points and some part of that should be passed on to customers. The base rate of SBI is 9.7 per cent. The average base rate of other banks is 10.2 or 10.25. We have asked them to take a look at base rates,” Chidambaram said.

After the meeting, Bank of India, one of the largest public-sector banks, announced a 25-basis-point cut, to 10 per cent. This will come into effect from Monday.

Other banks are expected to follow suit. Most large lenders — Bank of Baroda, Punjab National Bank, Canara Bank and Union Bank of India — have their respective base rates at 10.25 per cent.

“The scope to cut the rate is limited, but there may be a reduction of 10-25 basis points when banks review their base rates this month. As credit demand picks up and profit margins improve, interest rates can be reviewed again,” Indian Overseas Bank Chairman M Narendra said.

State Bank of India, however, is unlikely to do anything. “We are already at the lowest, at 9.7 per cent (base rate). Other banks have been asked to come to our level. Our home-loan rate is 9.95 per cent, while those of all else is 10.2 per cent. We are ahead of the curve,” SBI Chairman Pratip Chaudhuri said.

Chidambaram said banks did say that the room to pass on RBI’s repo rate cut was restricted. “Nevertheless all assured me they would review their base rates in July and take appropriate decisions. Reduction in rates will be a powerful booster to the economy and credit growth,” he added.

TOUCHING ALL BASES
Current base rates of various banks (%)

• State Bank of India
  9.70
• HDFC Bank
  9.60
• ICICI Bank
  9.75
• IDBI Bank, PNB, Union Bank, Bank of Baroda, Canara Bank
  10.25
• Bank of India
  10.00*

*Wef July 8
Source: Banks