The Hindu Business Line : SBI cuts prime lending rate by 0.25 percentage points

Mumbai, Feb. 11 In a move that is perhaps indicative of a softer interest rate regime, State Bank of India, the country’s largest bank, cut its benchmark prime lending rate by 0.25 percentage points from 12.75 per cent to 12.50 per cent on Monday. This will bring down the interest rates on retail and corporate loans that are linked to PLR.

The revised rate will be effective from February 16.

According to analysts, a cut in lending rates was expected considering that credit growth has been below targets despite enough liquidity.

Some other public sector banks, such as Canara Bank, Bank of India and Allahabad Bank, too, have cut rates on home and other retail loans , between 25 and 100 basis points, in the past few days.

The announcement of the rate cut also comes on the eve of the PSU bank chiefs’ meeting with the Union Finance Minister, Mr P. Chidambaram, in New Delhi tomorrow.

At the last meeting, Mr Chidambaram had asked PSU banks to step up retail loans in order to maintain the growth momentum. Retail loans, especially consumer loans, had seen a slight slowdown, partly due to the high interest rates.

Even the RBI Governor, Dr Y.V. Reddy, had expressed concern that there is scope for lot more to be done on the credit delivery and expansion front and that the RBI will discuss with banks if necessary.

Ms Chandana Jha, a banking analyst from PINC Research, said, other banks are likely to follow suit, as SBI is the leader. “Industry-wise credit growth has fallen. The feeling is that it will be difficult to see 20 per cent credit growth year-on-year, from the current levels of 14 per cent. So, this move by SBI was expected,” she said.

A senior official from State Bank of India said that the decision to reduce the rate was taken after the bank’s asset-liability management committee meeting on Saturday. “There is a general feeling that interest rates are high, which is also evident in the slowdown in credit offtake. We expect the reduction in rates will improve our credit growth,” he said.

In the quarterly review of the monetary policy last month, the Reserve Bank of India had indicated to banks that a slight moderation in deposit and lending rates would be welcome as deposit growth has exceeded targets and credit growth has moderated despite surplus liquidity.

“Notwithstanding the surplus liquidity conditions, banks’ credit has moderated,” the RBI statement had said.

According to the RBI figures, the non-food credit extended by scheduled commercial banks had increased only by 11.8 per cent up to January 4, compared to an increase of 17.5 per cent in the same period last year.

With the reduction in lending rates, banks will now be forced to bring down their deposit rates within the next month, said Ms Jha.

“SBI can grow its business as advances will pick up after the rate cut. But if they don’t cut deposits rates it will be difficult to maintain margins,” she said.

However, the SBI official said the bank will not reduce its deposit rates immediately, but would make some adjustments in some segments. “We have done an internal study and we find that this reduction will not affect our Net Interest Margin (NIM), provided we do some readjustment in our deposit portfolio,” he said.

In the last quarter, the NIM of SBI was at 3.01 per cent excluding CRR balances, which was higher than the second quarter of 2.84 per cent.

While yield on advances increased to 9.93 per cent (8.61 per cent), cost of deposits also increased to 5.55 per cent (4.71 per cent), which was mainly due to higher term deposits mobilisations and higher interest rates.