Lending, Deposit Rate Cut Flurry Ahead

A majority of public sector banks led by the State Bank of India are set to cut their prime lending rates as well as deposit rates next week ahead of the Reserve Bank of India's (RBI) monetary and credit policy announcement.

The lead has been taken by Central Bank and Union Bank of India. A day after Central Bank cutting its medium term PLR (MTPLR) and term deposit rates, Union Bank today announced a 25 basis points cut in its prime lending rate (PLR) to 11.50 per cent. The bank has also snipped the deposit rates. Both the rate cuts take effect from April 1.

Industry sources said other banks including SBI are expected to cut the lending as well as deposit rates next week. The trigger points are low credit offtake and healthy deposit accretion. The SBI will review the situation next week. Bank of Baroda chairman PS Shenoy said his bank would take a stock of the situation tomorrow.

BoB's PLR is now pegged at 11 per cent -- lowest in the industry -- while SBI's prime rate is 11.5 per cent. SBI sources said there is a case for 25-50 basis point cut in lending as well as deposit rates.

"We may not wait for the credit policy. There is sufficient liquidity and the credit pick up is still tardy. The deposit growth can only perk up as the mutual fund industry may lose its sheen with the imposition of deposit tax. There seems to be no choice but to cut the rates," said a bank chairman who did not wish to be quoted.

Some of the banks may go slow on lending rate cut but it is a certainty that there will be deposit rate cut across the board. "The interest rates on small savings and the Government of India Relief Bonds have already been pared by 50 basis points. With the repo rate being cut to 6 per cent, we cannot afford to keep the present interest rate structure as our cost of funds is actually higher than what we are getting after putting the idle money on the repo window," said another banker.

Both Union and Central Bank are realigning their PLR as it was pegged at a slightly higher compared with other public sector banks. But others may pare the rates chasing a chimera called corporate loan.