In a concerted move, four public sector banks on Wednesday cut their benchmark prime lending rates (PLRs). State Bank of India, the country's largest bank, and Canara Bank cut their PLRs by 25 basis points (0.25 pre cent) for the second time in just over a week, while Bank of India and Union Bank lowered their PLRs by 50 basis points.
The reductions in lending rates follow a lunch meeting of chairmen of large public sector banks last week to discuss the lowering of interest rates across the board, following finance minister P Chidambaram's appeal to banks on February 12 to make credit affordable and to help negate the impact of slowing credit on the growth of the economy.
Another public sector bank, Bank of Baroda's asset liability committee meets tomorrow to take a call on cutting its PLR. Punjab National Bank could not be reached to ascertain its call on cutting its lending rates. PNB Chairman, KC Chakraborty had also attended the lunch meeting.
SBI and Canara Bank had reduced their PLRs by 25 basis points on February 11, a day before Chidambaram met chairmen of public sector banks to assess the performance of the government-owned banks in the third quarter of 2007-08.
All four banks now have a PLR of 12.75 per cent. Significantly, no private sector bank has cut PLR yet. ICICI Bank, the country's largest private sector lender, had said it would consider cutting rates only after March.
The reductions in PLRs will have a significant impact on the earnings of the banks. SBI would face a Rs 1,000-crore (Rs 10 billion) loss in income on the loans portfolio as on December 31, 2007. The impact on Canara Bank's earnings would be about Rs 250 crore (Rs 2.50 billion), BoI's Rs 280 crore (Rs 2.80 billion) and Union Bank's Rs 200 crore (Rs 2 billion).
"It will take about a year to correct the impact on earnings," said T S Narayanasami, chairman of BoI. Union Bank also reduced interest rate on deposits for three years and above by 50 basis points to 8.25 per cent. The reduction in Union Bank's home loans range from 25 to 75 basis points.
In a statement, BoI said it reduced its PLR to help productive sectors bring down their cost of finance and stimulate demand for credit and to make home loans, auto loans and consumer loans, which generate more demand for manufactured goods, more affordable.
The year-on-year growth in credit is currently 22.5 per cent against deposit growth of over 27 per cent.
Although few banks actually lend funds at PLR -- bigger, reputed borrowers are usually charged lower rates -- lowering the benchmark rate can be considered a signal of a lower interest rate regime.
"The trend is towards rates remaining soft. The present spike in the short-term rates is not indicative of the trend but is driven by year-end tightness in liquidity," said M B N Rao, chairman of Canara Bank.
He pointed out that the incremental credit deposit ratio is just 56 per cent now against 91 per cent last year.
The statutory liquidity ratio investment portfolio of banks has grown substantially to close to 30 per cent (against minimum 25 per cent required), indicating 'stored' liquidity.
"So, at the beginning of the next financial year, pressures will subside and provide further room for lowering interest rates," Rao said.
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