SBI to cut SME loan rates by 150-200 bps

Central Bank and Union Bank cut base rate to 10.5%

State Bank of India (SBI), the country’s largest lender, will reduce interest rate on loans given to small and medium enterprises by 150 to 200 basis points (bps) by the end of the month.

The lender has already reduced auto loan rates by 75 bps and retail deposit rates by 25-100 bps.

News agency Reuters reported quoting SBI chairman Pratip Chaudhuri saying such a deep rate cut will not erode its margins. Though the lender has not reduced the base rate — the benchmark rate to which all loans are linked — it has reduced the spreads that it charged over the base rate. SBI’s base rate is at 10 per cent. Most public sector lenders and ICICI Bank — the largest private sector lender — have reduced base rate.

Two Mumbai-based public sector banks on Tuesday announced reduction in base rates. While Union Bank of India announced a cut of 15 bps, Central Bank of India reduced it by 25 bps. Both the lenders have the base rate at 10.5 per cent now, at par with some of their peers such as Punjab National Bank and Bank of Baroda. The new rates will be effective from May 1.

Apart from reducing the base rate, Union Bank also reduced the spreads over the base rate for housing and farm loans, D Sarkar, chairman and managing director of Union Bank said. “The reduction in spread, in addition to the base rate reduction, will further benefit our customers,” Sarkar said.

On the deposit side, Union Bank reduced the deposit rates for longer tenure maturities by 25-40 basis points. For deposits with short maturities, the interest rate has been revised upwards by 15-25 basis points. The deposit rates will be effective from April 27, 2012.

Central Bank of India also revised deposit rates for some maturities by 25-50 bps. The new rates will come into effect from May 1.

M V Tanksale, chairman and managing director of Central Bank of India, said: “There may be some impact on the margins in the short run and 80 per cent of the loan book consists of floating rate loans. However, in the next two months a significant amount of high cost deposit will come for renewal and that will be rolled over at the lower cost. But as the effect of deposit rate revision comes with a lag, margins will be impacted somewhat.”

Last week, after a gap of three years, RBI decided to cut the repo rate, or the rate at which it lends overnight funds to bank, by 50 basis points. This signalled a reversal of the interest rate regime. Most banks have responded to the central bank’s policy signal by cutting interest rates.