SBI leads another round of rate cuts

The moral suasion of the RBI forced many public sector banks to slash lending rates earlier this month. If that was not enough, political pressure from North Block (the home of the Finance Ministry) has prompted another round of rate cuts from nationalised banks. State Bank of India (SBI) led from the front, by revising down the Benchmark Prime Lending Rate for the second time this month. The Benchmark Prime Lending Rate (referred to as SBAR) was revised down by 25 basis points (bps) from 12.50% p.a. to 12.25% p.a. with effect from Feb. 27. SBI had cut PLR by 25 bps on Feb. 11. Other public sector banks to trim their PLRs included Bank of India, Union Bank and Canara Bank (also second time this month).

Union Bank cut its PLR by 50 bps to 12.75% after a board meeting in Lucknow. The bank also lowered floating rates on its home loans by 75 bps. Bank of India lowered its PLR by 50 bps to 12.75%, a week after it cut rates on auto loans by 50 bps, educational loans by 100 bps and consumer loans by 250 bps. The new rate cut would lower these rates by another 50 basis points. The new rates would come into effect from Feb 21 for Union Bank and Bank of India. Canara Bank also cut its PLR by 25 basis points, to 12.75%, effective Feb 25. Bank of Baroda slashed its PLR by 50 bps to 12.75% late on Friday. However, none of the banks have cut their deposit rates so far, and ICICI Bank, the country’s second-largest bank, has not yet lowered rates.

The slew of rate cut announcements by nationalised banks smacks of political interference at a time when rates in the inter-bank call money market have shot up, and bond yields too have inched higher. Liquidity conditions, which were pretty comfortable when the RBI announced its quarterly monetary policy have tightened, with the central bank now injecting money through its daily repo auctions. So, clearly the policymakers and markets are at a variance as far as the near-term direction of interest rates is concerned. The North Block wants rates to head south to boost consumption and overall economic activity, bankers are finding life difficult as liquidity has suddenly dried up. At the same time, they have been asked to cut lending rates.