Banks bow to diktat; snip lending, deposit rates

Banks bow to diktat; snip lending, deposit rates

Mint Street leader SBI yet to take cue, plays cool; home loans to get cheaper

Domestic banks, on Thursday, gave in to the government directive or ''advise'' to relook at the interest rates. Union Banking Secretary D K Mittal’s directive or ''advise'' to banks to reduce lending and deposit rates immediately had the desired impact, at least metaphorically.

Punjab National Bank (PNB) announced a cut in lending rate by 25 basis points, a move aimed to make housing and corporate loans cheaper. “The bank has decided to decrease the base rate by 25 basis points (bps) from 10.75 to 10.50 per cent,” PNB said. ICICI Bank too effected a similar cut of 25 bps in its base rate with effect from April 23, 2012. As such, its revised rate will be 9.75 per cent per annum as against 10 per cent at present.  Base rate is the minimum interest rate below which banks cannot lend to any one.

ICICI Bank also announced a reduction of 25 bps in its benchmark prime-lending rate (BPLR) and in its Floating Reference Rate (FRR) for consumer loans (including home loans) with effect from April 23, 2012. The above benchmark rates are used for determining interest rates on loans and advances sanctioned upto June 30, 2010. The fixed rate customers will not be impacted by the above reduction and their contracted rates will remain unchanged.

IDBI Bank too has slashed the minimum lending rate or base rate by 25 bps to 10.5 per cent. It also cut interest rates for deposits maturing in six months or above by 10-50 bps (one bps is one-hundredth of a percentage point). But the first to follow RBI signal, was Punjab & Sind Bank (PSB) which announced a cut in home and auto loans for new borrowers by up to 0.75 per cent reducing the benchmark lending rate by 50 basis points — to eight from 8.5 per cent – that marked the reversal of its monetary policy stance which focussed on containing inflation in the past three years.

In home loan, interest rates have been reduced by PSB between 0.25-0.50 per cent while for auto loan it varies between 0.25-0.75 per cent depending on maturity and amount borrowed. Prior to reduction, the bank offered home loan to its customers between 11-12.75 per cent and auto loan rate varied between 12.75-13.75 per cent. The new rates are effective from April 1, 2012.  Further, the EMI for auto loan is lowest at Rs 1,765 per lakh for the longest repayment period up to 7 years.  The bank is offering home loan at lowest EMI of Rs 1,016 per lakh (up to loan amount of Rs 30 lakh) with longest repayment period up to 25 years and no prepayment charges are levied.

“With the easing of systemic liquidity, we have already seen some correction in wholesale deposit rates. We expect the cost of funds to gradually come down and this reduction in the lending rates is a proactive move by us to pass on the benefit to our valued customers,” said Managing Director & CEO Chanda Kochhar.

With reduction in rates, likely to be followed by other lenders, housing and corporate loans would become cheaper for both PNB and ICICI Bank customers by at least 25 bps.
Besides, both the public and private sector lenders have also decided to slash interest rate on term deposits.

PNB decided to slash interest rate on term deposits of less than Rs 1 crore by 25-50 bps in select buckets with effect from May 1, while ICICI Bank announced a cut in interest rates for various tenors of retail fixed deposits by 25 bps with effect from April 23, 2012. The perception in the market was that banks were reluctant to cut their lending rates despite a reduction in their reserve requirements, saying tight cash conditions were keeping deposit rates high and deposit growth low, and are unlikely to match the full 50 basis point cut in the policy rate.  However, RBI gave a categorical signal for banks with its cut in policy interest rate by a deeper-than-expected 50 basis point to faster monetary policy transmission.

The central bank has lowered banks’ cash reserve ratio (CRR), share of deposits they maintain with it, by 125 basis point since January, releasing Rs 80,000 crore into the banking system but a severe cash crunch on lagged government spending and large dollar sales by RBI pushed the liquidity deficit to more than double its stated comfort zone this year, that reduced banks' ability to cut lending rates.

Surprisingly, State Bank of India (SBI) after the RBI’s policy meeting on Tuesday stated that it will cut lending rates only on some loans that have high interest rates. However, SBI is still to make the announcement.

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