FM gives banks three weeks to slash rates

FM gives banks three weeks to slash rates
The Financial Express, June 11, 2009, Page 1

Economy Bureau, New Delhi

Finance minister Pranab Mukherjee told the public sector banks they must cut their interest rates within the next three weeks to spur investment, ignoring the banks’ plea for some more time to take a call. “You have your constraints, I have my compulsions”, the minister said in his summing up notes to chiefs of the public sector banks on Wednesday, according to a source who attended the meeting.

In his opening speech at the meeting, Mukherjee said, “The banks have to stand by to provide credit at reasonable rates. This is an area of concern in many quarters both within the government and outside.”

According to him, the reduction in key rates by RBI has not been reflected in the reduction of prime lending rates of the banks. “I would urge the banks to address these concerns expeditiously and in adequate measure. This will help restore the environment for rapid growth, and ensure that the growth process benefits all our people.”

To help the banks meet the required rate of credit delivery without running short of capital, he promised them of additional infusion of capital to ensure their capital adequacy ratio stayed at 12%. While the banks at the meeting said they had already cut rates, twice in April and earlier in February, the minister told them that the current economic situation warranted a further round of rate cuts. He left the decision on the quantum of cuts to the bank managements. The banks also explained that over 70% of their loans were made at sub-BPLR rates.

RBI data shows costly credit and a fall in demand have pulled down credit growth to a five-year low of 15.9% year-on-year as of May 22. The latest weekly statistical supplement of RBI shows deposits were up 22.6% from a year earlier. Bankers said as the signals from the government were clear, they would honour the ‘commitment’ sought by the FM on a ‘more benign plan of action’.

OP Bhatt, CMD of State Bank of India, the country’s largest lender, said the bank would decide on a cut by the month-end. “We expect credit to expand 20% in the first half. Our bank will decide on lowering interest rates by the end of June,” Bhatt said. Other banks such as Uco Bank, Canara Bank, United Bank of India and Central Bank of India said they would pursue a cut in rates by this month.

“As always, we expect interest rates to go down,” finance secretary Ashok Chawla said after the meeting.

Mukherjee endorsed the consolidation process among the public sector banks saying that would make them more efficient and competitive.

Prime lending rates of the banks have come down to the range of 12.00-12.25% against 13.75-14.25% six months back, Mukherjee said, while expressing hope that pro-growth measures taken by the government would ‘turn the economy around soon’. “We would continue to focus on public spending in employment-oriented growth sectors,” he said.

While promising adequate capital infusion into banks, Mukherjee also pressed the banks to improve the credit expansion in priority areas like agriculture, infrastructure, micro-, small and medium enterprises, and education.

Uco Bank CMD SK Goel said, “We have already called a meeting of our asset-liability committee on June 19 to take stock of how much deposit rates can be reduced, and accordingly, how much lending rates can be reduced. By a rough estimate, I think we would be able to reduce deposit and lending rates by 100 basis points.”

UBI’s CMD SC Gupta said his bank would first cut lending rate by up to 50 basis points in the next 2-3 weeks. Punjab National Bank CMD KC Chakrabarty said, “PSU banks have been reducing interest rates but non-PSU lenders have not. If we reduce our rates further, it would be difficult for us to compete.”

However, Corporation Bank CMD JM Garg said an across-the-board reduction in rates is likely only by March-end 2010. He added that a further reduction in rates would put pressure on public banks’ net interest margin, which ‘is already declining slowly.’

“I think deposit rates would come down across bank only by March 2010. Banks are lending below PLR and effectively rates are low. We have already reduced the PLR by 50 bps, effective April 1, even though the cost of funds has come down only by 17 bps to 6.85%. The cost of funds should come down before we reduce our lending rate further,” Garg said.

The FM also said banks should pursue the business correspondent model to give a fillip to ‘financial inclusion’. “The branchless banking initiatives and the model of business correspondents and business facilitators need to be pursued vigourously to enable the country to achieve inclusive growth.”