Taking a cue from SBI, Bank of Baroda has also decided to cut its PLR. In fact, officials at these two banks do not think that the cut will serve its purpose of increasing credit offtake. Hence, it is predicted that a further cut is in the offing.
On the liabilities side, SBI has already set the ball rolling with a rate cut on the non-resident non-repatriable (NRNR) deposits by 1.5 percentage points at yesterday's board meeting.
SBI chairman P G Kakodkar said: "The PLR will be cut further in case the credit offtake does not increase despite the commencement of the busy season this month." The cut is expected to further split the nationalised banks, as none of banks in the east will be able to cut lending rates.
This is the second time in the last two months that the country's largest commercial bank has been forced to cut the PLR in the face of a net decline in offtake in non-food credit. Most of the new private banks and foreign banks are likely to follow the SBI example in the next few days.
The public sector banks are, however, divided on the issue. While Bank of Baroda has promptly decided to follow SBI, others -- particularly the weaker PSU banks -- have no plans for a rate cut.
Both Industrial Credit & Investment Corporation of India (ICICI) and Industrial Development Bank of India (IDBI), two mega financial institutions, have also no immediate plan to slash the PLR -- currently pegged at 17 per cent.
"SBI advance rate, which is the prime lending rate applicable to the bank's top-rated borrowing clients, has been reduced to 15.5 per cent per annum from 16 per cent," an SBI release said yesterday.
"We have no choice but to cut the PLR to attract borrowers.
What is the point in mopping up deposits if we cannot deploy the funds? We do not plan to go all-out for investments as we have already had an excess SLR holding of over Rs 12,000 crore," Kakodkar said.
Between the last week of March and July, SBI's domestic deposits grew by Rs 1,800 crore while the advances registered a negative growth of Rs 2,600 crore.
This is against the annual deposit target of Rs 14,000 crore and advances at Rs 9,000 crore, fixed for 1996-97. Last year, SBI advances grew by Rs 11,400 crore and deposits Rs 11,900 crore.
"If the situation continues, we will have to bring down the deposit rates also. The SBI board will take stock of the situation in the middle of October," the chairman said.
At present SBI pays maximum 13 per cent interest on deposits of three years and above.
According to Kakodkar, the decision to bring down the prime lending rate to 15.5 per cent is an ad hoc arrangement.
"We will constantly review the situation. If the credit offtake picks up in the busy season, the PLR rate can be hiked. On the other hand, if the credit situation continues to be slack, the prime lending rate can be slashed further along with a cut in deposit rates. We will get a clear picture next month," he said.
Most of the bankers feel, a 50-basis points cut in prime lending rate is nothing but a cosmetic change which will not bring back corporates. "There will be further cuts in phases. Otherwise, the blue-chip companies which are accessing the commercial paper market at cheaper rates will not seek bank finances," one senior banker said.
Bank of Baroda chairman K Kannan said his bank would bring down the prime lending rate to 15.5 per cent at the bank's next board meeting on September 14.
He, however, ruled out the immediate possibility of slashing the deposit rates.
At present, all public sector banks have uniform deposit rate although the prime lending rate varies between 15.5 per cent and 16.5 per cent.
The banks offer 8 per cent interest on deposits between 30 and 45 days, 9 per cent on 46-179 days, 10 per cent on 180-364 days, 11 per cent on one-two years, 12 per cent on two-three years and 13 per cent above three years.
Other Mumbai-based banks like Bank of India and Dena Bank have no plans to bring down the PLR which is pegged at 16.5 per cent -- one percentage point higher than that of State Bank of India. "We look at the real effective interest rate and not at prime lending rate. If we can, we will try to pass on the benefit of easy money to the borrowers," Central Bank CMD S Doreswamy said. According to Dena Bank chief Ramesh Misra the credit growth in his bank is sufficient and hence there is no immediate need for bringing down the prime lending rate .
The new private banks and foreign banks which have pegged their prime lending rate at a higher end -- between 18 per cent and 19.5 per cent -- will bring it down by 50 basis points to one percentage point. ANZ Grindlays will annouce a reduction in PLR from 18.5 per cent to 17.5 per cent next week. "We will slash the PLR by the end of this month when our board meets," Centurion Bank chief A K Sen said.
The financial institutions have, however, ruled out any downward revision in the PLR. "There is no drop in our advances and sanctions. The demand for credit is, in fact, growing. I do not foresee any cut in lending rates," ICICI managing director and chief executive officer K V Kamath said.
One Industrial Development Bank of India senior executive pointed out that the marginal cost of funds for institutions is much higher than that of the banks and hence prime lending rate can be brought down only at the cost of the institution's profitability. Among the institutions, Industrial Finance Corporation of India (IFCI) has the lowest PLR, pegged at 16 per cent.