PSU banks decide not to hike rates

Jaipur/ New Delhi/ Mumbai, July 16: You need not worry about an increase in your equated monthly instalments after RBI’s late night action on Monday. The finance ministry has leaned on public sector banks that control around 70% of the business against raising rates to keep a large constituency of middle class and corporate borrowers pacified ahead of key elections. After all, for over a year now, the finance ministry has been prodding RBI to cut rates, while the central bank has refused to toe the government line. Instead, on Monday it signalled a reversal in policy to offset the impact of the weakening rupee by announcing several measures that will push up the cost of funds for banks.

While there were expectations of banks responding with hikes in the coming days, the finance ministry swung into action and impressed upon banks to maintain status quo.

By evening the impact was visible as banks started issuing statements, saying rates will not go up. “The measures taken by RBI are designed to curb speculation in the market and are not seen by SBI as indicative of any systemic problem or deeper malaise. It is, therefore, expected that the position in the market will stabilize shortly. Hence neither the management nor the board of SBI that met on Tuesday in Mumbai felt that this requires any adjustment of lending,” State Bank of India said in a statement. Taking a cue from the largest lender, others including Punjab National Bank, Bank of Baroda and IDBI Bank followed suit.

Earlier on Tuesday, finance minister P Chidambaram seemed to lay down the ground rule. While kicking off a pre-election campaign on government schemes, Chidambaram said he did not expect banks to raise interest rates. “These measures are intended to quell excessive speculation in the forex market, reduce volatility and stabilize rupee. They should not be read as a prelude to any policy rate changes,” he said. Admitting that the high current account deficit has made the rupee weaker, the finance minister said, “Given the current account deficit and the inflation, some depreciation of the rupee is expected. But sometimes there is excessive speculation in the foreign exchange market and the role of RBI is to ensure that volatility is cut.

The tight liquidity situation due to the recent measures raised concerns of growth being impacted. But the finance minister allayed such fears. “These measures will in no way affect our commitment to growth. We must increase credit delivery and stimulate growth.” He reeled off a number of reforms and initiatives taken by the government in the last four months to revive growth and reverse the policy paralysis that has stalled projects approvals.

RBI wants banks to cut base rates, not select lending rates

Mumbai, August 6: With banks led by the country’s largest lender State Bank of India (SBI) choosing to cut spreads on certain categories of loans instead of the base rate, deputy governor Anand Sinha today said the Reserve Bank would like the banks to cut the minimum lending rate to better carry forward its monetary policy measures.

“The base rate is supposed to be responsive to the changes in monetary conditions Reserve Bank would definitely want the responses to be through the base rate,” Sinha said at an IDBI Bank event here. Sinha further said an RBI committee on interest rates, headed by him, is looking into these aspects.

The committee, supposed to come out with report last month, has made progress and will be submitting it soon. Replying to a question, Sinha said banks are unable to cut their base rates as per the monetary policy changes, because they carry the burden of fixed rate deposits and fixed costs to service that over a longer-time.

“Banks are not able to respond quickly to the changes in monetary conditions or monetary policy signals because they carry a fixed cost over an extended period of time,” he said, flagging this as a subject of discussion with bankers during deliberations on floating deposit rates.

On asked if the RBI which has been discussing floating rate deposits but also stressing fixed rate loans is concerned over potential asset liability mismatches, Sinha replied in the affirmative. “Asset liability concern, in the long-term, yes,” he said, adding that so far banks have been successful in managing the longer gestation infrastructure projects.

Though, since January, the RBI has cut repo rate by 50 bps and CRR by 125 bps, and a 100 bps SLR cut last week, the effect of the same has not been passed on to the customers by banks by lowering interest rates as a whole. Instead, banks have been cherry-picking interest rates reduction, and have not lowered their base rates, which would automatically lead to a similar reduction in interest rates for both existing as well as the new customers.

Some banks like State Bank and Union Bank of India, among others, have slashed interest rate on certain loan products like home loans and lending to SMEs, but have not cut the base rate, or the minimum rate of lending.