Union Finance Minister Pranab Mukherjee may coax and cajole banks to drop lending rates but the public sector banks (PSBs), led by the country’s two largest State Bank of India and Punjab National Bank, told him here today there is little room for rate cuts now.

While the Reserve Bank of India has slashed key policy rates by 450 basis points between September 30, 2008 and May 30, 2009, SBI has cut its benchmark prime lending rate (BPLR) by just 150 basis points to 12.25 per cent. Most PSBs have followed the big daddy of banking and cut their BPLRs by a similar quantum or even less.

A banker present at a review meeting taken by the Finance Minister with chief executives of PSBs quoted Mukherjee as saying at the end, “You have your constraints but you have to understand my compulsions.” This was a reference to the government’s objective to sustain growth. PSB chiefs, on the other hand, cited need for additional capital, fear of bad loans in times of economic slowdown and high deposit rates as reasons for holding back cuts in lending rates for now.

According to the finance ministry, the growth rate in overall credit for scheduled commercial banks has slowed down considerably from 28.5 per cent in 2006-07 to 19.72 per cent in 2008-09. But public sector banks blamed the lower increase in 2008-09 to less disbursal by the private sector and foreign banks besides the global economic slowdown and contraction in demand.

Interestingly, bankers said a major reason for lower increase has been lump-sum repayment by companies. “In January 2009 alone, companies repaid Rs 40,000 crore compared with the repayment of Rs 38,000 crore during January-March 2008,” said a PSB chairman. State-owned banks’ lending jumped 23.91 per cent in 2008-09 as against 10.07 per cent increase for private banks and 4.12 per cent for foreign banks, he pointed out.

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