SBI takes lead in cutting PLR, others set to follow

SBI takes lead in cutting PLR, others set to follow
ENS ECONOMIC BUREAU

MUMBAI, FEB 17: One day after the Reserve Bank of India (RBI) slashed the bank rate and cash reserve ratio (CRR) signalling a fall in interest rates, State Bank of India (SBI) -- the largest commercial bank in the country -- on Saturday took the lead in cutting the prime lending rates (PLR). While SBI reduced its PLR by half a percentage point, other commercial banks are expected to follow the suit in the coming days.

SBI's PLR known as State Bank Advance Rate (SBAR) has been reduced to 11.50 per cent from the present level of 12 per cent per annum, an SBI release said. However, the management of the bank did not find it necessary to make any change in the Medium Term Lending Rate (SBMTLR) and left it unchanged at the present level of 12 per cent per annum.

Public sector Bank of Baroda has called its board meeting next week to make an effective change in its PLR, but it is likely to leave the deposit rate unchanged. Dena Bank has fixed its board meeting on February 23 to review the situation and announce a cut in its PLR.

Indusind Bank manager director K R Maheswari said that the bank's board would meet on February 22 to consider a reduction in lending rate from 15 per cent to 14.5 per cent per annum while it would like to leave the deposit rate unchanged.

Bankers said that there would be a lot of resistance from both private and public sector banks to reduce their deposit rates because all of them are in fierce competition to mobilise deposits. "With the government small savings rate still remaining higher, banks would be risking a flight of funds if they cut deposit rates," they observed.

The latest RBI measures would enhance the liquidity levels in the system which is already adquate on account of fund inflows of Rs 25,000 crore ($ 5.5 billion) in November last from the State Bank's India Millennium Deposits, bankers said. However, some banks which are not comfortable with their liquidity position may wait till the announcement of the Union budget on February 28. They felt that the government would effect a cut in its saving rate in order to provide an indication of a lower interest rate regime in the country.

In the current circumtances, banks would find it very difficult to hold reasonable margins on its lending as the interest spread would narrow down further following one-side revision of rates. "While the cost of bank borrowing continued to remain unchanged, the lending rate has fallen," bankers added.

Bank chiefs expect another round of bank rate cut after the budget. According to SBI chairman Janaki Ballabh, though the CRR cut will add to liquidity, the cut in the interest rate at this point would impact the bottomline of the bank. "Though any reduction in the interest rate will put extra pressure on the bank as they have to take a hit on account of VRS and extra provisioning on account of NPAs, banks with financial strength will be able to accommodate the bank rate cut," analysts said.

Analysts said if the government set a lower borrowing target for 2001/02 (April-March), it could pave the way for further easing in the central bank's monetary policy. The current year's gross borrowing target is Rs 117,00 crore.

Small savings rate may be cut

MUMBAI: Bankers are now expecting a reduction in rates on some government-run savings schemes which will create an environment for further rate cuts by the central bank.

Some savings schemes administered by the government offer interest rates of 11 per cent, in addition to tax benefits, and these high returns prevent banks from lowering their deposit rates. ``The bank rate cut was expected after US Fed rate cut. It will further lead to a cut in the rate of the Provident Fund and National Savings Certificates," said an analyst.

"A cut on small savings rates is also expected which could cause the interest rates framework as a whole to move downward," said Sanjit Singh, debt analyst at ICICI Securities and Finance Company, adding, "Our expectation is that another 50-basis-point cut is likely though it is difficult to set a time-frame. Such expectations will keep prices buoyant."