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Public sector banks (PSBs) are likely to cut their base rates by at least 20 basis points to prop up an economy that is growing below potential. The base rate is the interest rate below which banks cannot lend.
The decision on cutting base rates will not be linked to the Reserve Bank of India’s monetary policy review on July 31.
Without waiting for the next policy review, PSBs are expected to cut base rates in the next 10 days.
The advice to cut base rates came on Wednesday from Finance Minister P. Chidambaram, who felt that State-run banks must pass some of the benefits of RBI policy rate cuts to its borrowers.
However, State Bank of India (SBI), the country’s largest commercial bank, has decided to keep its base rate unchanged at 9.7 per cent.
There is no question of SBI reducing base rate, as its rate is already the lowest in the market, SBI Chairman Pratip Chaudhuri said after the bankers’ meeting with Chidambaram on Wednesday.
In fact, other banks (which have a base rate of about 10.2 per cent) have been asked to come to SBI levels, Chaudhuri said.
Two crucial steps
To provide comfort to banks, the Finance Ministry is likely to take two crucial steps in the coming days, banking industry sources said.
First, it is likely to bar PSBs from paying interest on their bulk deposits at a rate higher than their interest rates on retail deposits.
The other directive would relate to the aspect of public sector enterprises (PSEs) parking their surplus funds with banks.
All Central PSEs may be asked to park at least 60 per cent of their surplus funds with public sector banks.
The benefits from these two directives will further bring down the cost of funds for State-run banks. This will encourage them to cut their base rates, sources said.
What BANKERS think
Over the next few days, several banks may cut their base rate, said a bank chief who attended the meeting. “We will apply our mind and take appropriate decision,” said S.L. Bansal, Chairman & Managing Director, Oriental Bank of Commerce. K.R. Kamath, Chairman & Managing Director, Punjab National Bank, said the Finance Minister had suggested some measures, including a cut in base rate, to prop up the economy. He expressed confidence that the asset quality pressure on the economy would ease in the coming days.
Arun Kaul, Chairman and Managing Director, UCO Bank, said banks’ approach to base rate cut would largely depend on the cost of their deposits and the credit growth in the economy.
M. Narendra, Chairman & Managing Director, Indian Overseas Bank, said he would look into the cost structure issues and then take a call.
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