Banks bow to government; ICICI Bank, PNB cut lending rates, others to follow suit

ICICI Bank and Punjab National Bank took the lead among major lenders in lowering deposit and lending rates by 25 bps, which will not only reduce monthly payments on home and car loans but also cheer policymakers.

But Bank of Maharashtra's decision to bring down its benchmark rate by just 10 basis points to 10.5% probably reflects the reality - that few believe market rates will trend down and deposit growth will be sufficient for future rate cuts. A basis point is 0.01 percentage point.

Bankers, who were unwilling to commit on rate cuts the day the Reserve Bank of India surprised with a 50-basis-point cut in benchmark interest rates, are now falling in line partly due to moral suasion, say experts.

"While there is government pressure on public banks to reduce rates, private banks like ICICI Bank or others will follow suit under competitive pressure," said PK Choudhury, vice-chairman and group CEO at rating company ICRA. "Otherwise, they will lose quality customers. Everybody will take baby steps and look at the reaction of competitors."

ICICI Bank's so-called base rate, the rate below which it can't lend, is now at 9.75%. Punjab National Bank's base rate falls to 10.5% after the cut.

IDBI Bank made the first move on Wednesday and others such as Union Bank of India and State Bank of India are likely to follow.

"With the easing of systemic liquidity, we have already seen some correction in wholesale deposit rates," said Chanda Kochhar, managing director and chief executive officer at ICICI Bank. "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."

Rates in the overnight call money market are down to 8.25%, from 8.75% before the policy rate cut, and three-month certificates of deposits are being sold at 9.2%, compared with 10.5% before the policy. Banks are still borrowing more than 1,00,000 crore a day from the RBI, reflecting tight liquidity.

The banks' action follows a letter from DK Mittal, secretary, financial services, at the finance ministry, to chairmen of state-owned banks to reduce interest rates.

RBI Governor Duvvuri Subbarao was also vocal that banks should pass on the benefits of his action to customers as lenders in the past profited from the central bank's largesse.

"One of the considerations between a milder policy rate action and what you consider a more decisive action is the impact it will have on transmission," Subbarao said Wednesday after the rate cut. "We wanted to send a stronger signal."

ICICI Bank's revised rates would be effective from April 23 and PNB's from May 1.

Following the revision, ICICI Bank's rate on home loans below Rs 30 lakh will be 10.25%, little cheaper than its rivals HDFC and SBI as both are charging 10.50%.

However, in case of big-ticket home loans above Rs 75 lakh, ICICI Bank's new rate at 11.25% will continue to be higher than HDFC and SBI's 11%.

While most banks will lower rates, at least to be seen as responding to policy measures, there could be a hit on profitability of some banks.

"Cost of deposits varies between banks and base rate calculations also take parameters like overhead cost into consideration," said MR Nayak, executive director at Allahabad Bank. "We will examine all these parameters before taking a decision on base rate. We are also watching what others are doing."

Source: EconomicTimes