SBI plans ‘deep lending cuts’, others snip

State Bank of India (SBI), the country’s largest lender, on Thursday said it is cutting interest rates substantially to benefit lenders.

“Deep cut in lending rates made. SME, corporate and car loans benefit,” SBI chairman Pratip Chaudhuri said in reply to a text message from DNA.

The bank had convened its assets and liability committee (Alco) meeting late Thursday to discuss interest rates.

The day saw ICICI Bank and Punjab National Bank, the second- and third-largest banks in the country, respectively, lower their lending and deposit rates by 25 basis points, respectively.
IDBI Bank had announced a similar cut on Wednesday.

Meanwhile, the street was abuzz over reports that the government had ordered banks to reduce lending rates following the 50 basis points (bps) repo rate cut announced by the Reserve Bank of India (RBI) on Tuesday.

“They asked us to relook on this issue. We are reviewing,” D Sarkar, chairman and managing director at Union Bank of India, told Reuters. “Whatever instruction is coming from the ministry and the Reserve Bank, we will consider,” he said, adding that the bank’s board will meet on Friday and an announcement on cutting rates is likely Saturday or Monday.

The central bank has lowered banks’ cash reserve ratio, or the share of deposits they maintain with it, by 125 basis point since January, releasing Rs80,000 crore into the banking system.
However, the lenders have desisted from easing rates as the liquidity deficit still persists and their cost of funds remains high.

The central bank’s bigger-than-expected rate cut was, in fact, aimed at spurring faster monetary policy transmission and giving a stronger signal to banks to pass on the reduction.
“If the RBI cuts rate, the implication is banks will pass it on to their customers. It looks a part of it may be passed on,” said AK Bansal, executive director at state-run Indian Overseas Bank.

As such, cash conditions have improved quite a bit since the end of March, with banks’ repo borrowings from the RBI easing to around Rs1 lakh crore this week from a record high Rs1.96 lakh crore on March 26.

Bankers expect the cash conditions to ease further as government spending comes in. Also, typically subdued loan demand in the first half of the fiscal year will reduce pressure on banks to lure investors with higher 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 Chanda Kochhar, managing director of ICICI Bank.

As of April 6, bank deposits were up 14.3% year on year, while advances grew 18.7%.