State Bank of India and Canara Bank on Monday took bold steps and cut their prime lending rates (PLRs) by 25 basis points (bps), thereby indicating that the long-term view on domestic rates is seen softer. While other government banks like Allahabad Bank, Bank of India and Bank of Maharashtra did not tamper with their PLRs, they did cut rates between 25 bps and 250 bps on selective retail loans like housing, education and a few consumer loans.
Ironically, all these banks cut rates a day ahead of their meeting with the finance minister P Chidambaram on Tuesday. While the rate cut did not have an impact on the markets — debt or equity — bankers view the moves by SBI and Canara as a major indicator towards an easing trend in rates. The cut in PLR, unlike other banks, implies the rate-cut has been across the board for SBI and Canara loans.
Banking circles are debating the move, especially after the Reserve Bank of India (RBI) left key policy rates unchanged when it unfolded its third quarter review of monetary policy on January 29 this year. ?What signals are being seen by SBI and Canara that we don?t see?? quipped a senior banker at a foreign bank. ?Nobody is hinting at a CRR or SLR cut,? he added.
Bankers who spoke on condition of anonymity said compulsions rather than fundamentals appear to have taken precedence for SBI. Most said they expect some easing signs from the new fiscal beginning April 1 but not this early. ?Why should the bank cut PLR when the latest inflation rates have risen to 4.11% from 3.9%?? asked a senior banker at a private bank. However, SBI insiders deny there are any compulsions, and claim that the cost of its bank deposits has come off its highs and the PLR cut is not seen narrowing spreads.
However, another banker said, SBI could afford to take a hit on narrowing margins for two months, when its high costs deposits get retired, but more than that the bank is slated to receive an estimated Rs 18,000 crore through its rights issue which is priced at Rs 1,600, a steep discount, when the secondary market rate last traded on Tuesday was Rs 2,052. This apart, the amount will also be free of interest.
?It will take a while and perhaps this would be the right time to take a preemptive approach than facing a steeper cost at a later date,? said an analyst. According to him, the US Fed could have avoided the two steep rate cuts of 75 bps and 50 bps on January 22 and 29 respectively had they seen the seriousness of the subprime crisis when it first unfolded in July 2007. Perhaps the SBI move could be to avert steeper cuts to boost its loan portfolio before competition hots up, he added.