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PSU banks to cut deposit, lending rates in Jan

By BS Reporter in Mumbai
December 19, 2008 12:01 IST
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While deposit rates are expected to come down by up to 100 basis points, a decision on benchmark prime lending rates (BPLR) will be taken by banks over the next few days. The decision came after a meeting of Mumbai-based public sector banks with Finance Secretary Arun Ramanathan.

Union Bank of India CMD M V Nair said liquidity in the system is adequate and the yields on the government bonds have declined sharply. "Inflation has come down substantially. This is an appropriate time to reduce cost of funds and there is no reason why the deposits rates should remain high," he said.

"Maybe in the first week of January, many banks will be in a position to drop BPLRs. Interest rates may not come down immediately but from January 1. The fact remains interest rate on lending, deposit will come down sharply," said Bank of India chairman and managing director T S Narayanasami.

Dena Bank chairman and managing director P L Gairola said, "Inflation has come down to below 7 per cent and with the yields on government securities coming down, there is a case for reduction in the deposit rates, so that subsequently the lending rates could be lowered."

Inflation, measured by wholesale price movement, fell to 6.84 per cent for the week-ended December 6 from 8 per cent in the previous week.

The yield on 10-year benchmark government bond ended at a 54-month low of 5.49%.

Apart from prodding banks to lower interest rates, Ramanathan, who has already held one round discussion with bankers in Kolkata and Bangalore, also reviewed the credit delivery situation in sectors such as small and medium enterprises, housing and exports.

A banker said the government has sounded out to state-owned banks to revise the upward target for credit in 2008-09 by 20-25 per cent on an incremental basis.

The revision is sought as a part of the government's push to step up financial support to industrial units, especially MSMEs, which are facing cash flow and demand problems in the economic downturn.

While the liquidity situation also came up for discussion, the public sector bank chiefs did not seek further measures from the Reserve Bank of India as the system is flush with funds.

Unlike most occasions, when the advance tax payments drain out liquidity, call rate has held around the 6.5 per cent mark though companies paid the third installment of advance tax on December 15. What has also helped is the lower outgo due to the slowdown in the economy, which has impacted sales and revenues of many firms.

Most banks, barring Union Bank of India, HDFC Bank and Yes Bank, have not cut deposit and lending rates after the latest RBI action which saw it lower the repo rate and the reserve repo rate by 100 basis points each.

Public sector banks had lowered BPLR by 50-150 bps last month and cut deposit rates at the start of the month. They lowered lending rates for home loans up to Rs 20 lakh (Rs 2 million) and small and medium enterprises.

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BS Reporter in Mumbai
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