Centre turning dictator? Government orders PSU banks to cut rates immediately

The government has ordered state-run banks to lower lending rates immediately even before the ink has dried on the Reserve Bank of India's decision to cut interest rates, potentially adding to the corporate governance debate triggered by the imposition of its will on Coal India.

The direction from DK Mittal, secretary, financial services, may put many lenders in a tight spot as profitability and cost structures differ between banks, said two persons familiar with the development.

"With the reduction of CRR and repo rate, all lending rates be relooked at very quickly," Mittal wrote to state-run banks' chairmen. "Direct lending to agriculture has to be 13.5% and growth has to be 25% over 2011-12."

The RBI has cut cash reserve ratio twice and bought government bonds, releasing more than 2 lakh crore into the system to ease liquidity pressures. It cut repo rate - the rate at which it lends to banks -by 50 basis points to 8% on Tuesday. A basis point is 0.01 percentage point.

"Micro management is not desirable when it becomes a routine," said DK Dhingra, former executive director at state-run Uco Bank.

IDBI Bank, a relatively small lender compared with State Bank of India or Punjab National Bank, cut its benchmark lending rates by a token 25 basis points to 15% on Wednesday. But many big banks that raised deposit rates recently are still studying the market.

"It's not acceptable that someone interferes on a daily basis," said Ravi Trivedy, a consultant and former partner at KPMG. "The government or the Reserve Bank can frame the policy parameters. Once these are in place, one should allow the professional managers to take independent decisions. It's a governance issue," he said.

Bank chairmen say policy rate cut does not automatically lead to lower market interest rates since there are issues such as slow deposit growth, rising bad loans and an uncertain environment where inflation could rear its head again and upset all calculations. "I will be genuinely concerned about the deposits growth because bank deposits are getting crowded out because of other competing savings instruments," State Bank of India Chairman Pratip Chaudhuri said after the rate cut.

Source: EconomicTimes