State-owned banks agree to cut rates

To furnish fortnightly report on credit flows.

State-owned commercial banks, which account for around 96 per cent of the domestic credit market, have agreed to cut benchmark prime lending rates (PLR) 0.75 percentage points to stoke growth.

The decision came after 28 bank chairmen met Finance Minister P Chidambaram on Tuesday.

The finance ministry has also asked the banks to furnish a fortnightly report on credit flows so that all sectors of the economy receive adequate attention.

Chidambaram added that the liquidity situation is being monitored “24/7” and the central bank will provide additional support to banks, including in foreign currencies, to meet their fund requirements.

 

“We discussed at what price credit should be available to borrowers. The Indian Banks Association assured me that they will reflect on the matter and come up with some decisions,” Chidambaram told reporters after the meeting.

The decision by government-owned banks comes against the background of corporate complaints of high borrowing costs and a non-availability of fresh credit despite several step the central bank took to increase liquidity through cut in cash reserve ratio (CRR), the money banks keep with the central bank. Yesterday, chiefs of industry chambers met the finance minister. The meeting followed a larger one between Prime Minister Manmohan Singh and CEOs of some of India’s largest corporations.

Bank PLRs have risen steeply from 9 to 10.5 per cent this time last year to 13 to 14.5 per cent now after the central bank raised reserve requirements earlier this year to cool inflation, which exceeded 12 per cent a few months ago.

OP Bhatt, chairman of State Bank of India (SBI), India’s largest bank, said any rate cut would be effective November 10. “Our asset liability committee will meet tomorrow. A decision to cut PLR by at least 50 basis points is likely,” he added. One basis point is one-hundredth of a percentage point. Bhatt added that deposit rates will also be reduced in two or three weeks.

However, Bank of Maharashtra Chairman and Managing Director Allen C A Peirera, said: “All public sector banks have agreed to cut PLR by 75 basis points.”

Meanwhile, Syndicate Bank on Tuesday cut PLR 75 basis points to 13.25 per cent with effect from November 4, 2008.

Though the move will make available retail and corporate loans at lower cost, public sector banks — many of them listed — may see profitability drop marginally as a result.

For instance, Indian Bank, which is also planning to reduce PLR by 50 to 75 basis points, said the decision will impact it net interest margin 12 basis points. Net interest margin is the difference between lending rate less cost of funds and overheads.

Chidambaram also impressed upon banks the need to utilise the special windows opened by the Reserve Bank of India (RBI) by relaxing statutory liquidity ratio (SLR) norms to provide banks liquidity to lend to cash-starved mutual funds and non banking financing companies. SLR is the amount banks must mandatorily invest in government securities.

Against the cash availability of Rs 60,000 crore under the special windows, banks have withdrawn only Rs 11,000 crore.