SBI cuts rates, pressure on others

The country’s largest lender, State Bank of India, today announced a 75-basis-point cut in its benchmark prime lending rate, bringing it down to 12.25 per cent from January 1.

In addition, it said that deposit rates would fall by 25-100 basis points across maturities, with the 9-per-cent offer on 1,000-day deposits being the highest slab. One basis point equals one-hundredth of a percentage point.

The move comes two days after public sector bank chiefs met finance secretary Arun Ramanathan and agreed to cut lending and deposit rates from January.

Most banks had refrained from announcing rate cuts after the Reserve Bank of India, as part of its measures to boost economic growth and credit flow, lowered the repo and reverse repo rates by 100 basis points each from December 1.

Bank of India is expected to lower lending rates by 50-75 basis points when its asset liability committee meets on Monday, a bank executive said. A Bank of Baroda executive said: “SBI’s decision will induce other banks, including us, to cut rates. We will study the implications on the net interest margins and the inflation trend and review interest rates next week.”

An Allahabad Bank executive said the pressure on other banks to mobilise deposits at lower rates would subside since the market leader had cut rates.

Yesterday, Punjab National Bank had said it would consider further reduction in interest rates. The bank has already reduced its BPLR by 150 basis points over the last eight weeks.

SBI and other public sector banks had lowered lending rates by 50-75 basis points last month and deposit rates at the start of this month. They had decided to stay away from high-cost bulk deposits to reduce the cost of funds so that lending rates could be trimmed further.
 

CUT OUT FOR GROETH
Lender	PLR cut (bps)	New PLR (%)	Effective date
SBI	75	12.25	Jan 1, 2009
Union Bank	75	12.5	Dec 8, 2008
HDFC Ltd	50	14.5	Dec 22, 2008
HDFC Bank*	50	16	Jan 1, 2009
Yes Bank	50	16.5	Dec 8, 2008
* The reduction was in two tranches of 25 basis points each, with the first cut effective Dec 15, 2008; PLR: Prime Lending Rate; bps: basis points

Private sector lenders, barring HDFC Bank, its parent and mortgage player HDFC and Yes Bank, have not yet announced a rate cut. During an interaction with Business Standard yesterday, ICICI Bank Joint Managing Director and CFO Chanda Kochhar said the country’s second-largest bank would wait till February before cutting rates. The bank has a chunk of deposits raised at high cost.

A senior SBI executive said the decision to reduce rates was taken against the backdrop of the falling yield on government securities and the plummeting call rates.

The reduction in rates will affect the bank’s net interest margin by 7-8 basis points. While the bank has to forgo a part of interest income due to lower BPLR, there will be some saving due to the reduction in deposit rates.