FM asks public sector banks to cut rates, SBI demurs

NEW DELHI: Finance Minister P Chidambaram on July 3 urged state-run banks to cut floor lending rates to spur demand, but the country's largest lenderState Bank of IndiaBSE 0.95 % responded swiftly, saying its rate was already low and reducing it further was not an option.

"Reduction in base (or floor) rate will be a powerful stimulus to boost credit growth," Chidambaram said after a review meeting with the heads of government-owned banks on July 3. The FM said that unless the 
base rate is cut, interest rates cannot be brought down.

But minutes after the meeting, SBI Chairman Pratip Chaudhuri said the guidance to cut rate does not apply to his bank as its base rate is at 9.7%, the lowest among all state-run banks.

Among large institutions, Bank of India reduced its base rate by a quarter point on July 3 to 10%.

State-owned banks have a market share of close to 70% while SBI commands a share of 20%.

"Other banks have been asked (by the finance minister) to come to SBI's level," said Chaudhuri, adding that the bank's 
home loan rates are at 9.95% while everybody else is at 10.2%. "We are ahead of the curve," he said.

Often, many state-run banks take cue from SBI on 
interest rate actions.

Banks complain of limited headroom

With deposit growth refusing to pick up, banks are left with limited room for rate cut.

"The average base rate of other banks is 10.2% or 10.25%...The Reserve Bank of India has cut its policy rates by 125 basis points...some part of this must indeed be passed on to borrowers," Chidambaram said. Banks told Chidambaram that the room to pass on the rate cut to consumers is rather restricted as the provisioning requirements have increased by 50 basis points because of the new norms, and the cost of raising money has also gone up by 40-50 basis points.

"Nevertheless, all of them assured me that during this month they will review their base rates and take appropriate decision on cutting the base rate," said the finance minister.

Since April 2012, the central bank has cut the benchmark repo rate - the rate at which banks borrows from the RBI - by one percentage point. But banks have only passed on a part of the rate cut: base rates of public sector banks, which were in the range of 10-10.75% in April 2012, were down to 9.70-10.25% at the end of March 2013.

High interest rates and slower growth has depressed loan offtake to 15.62% in 2012-13, from 17.76% in the year before. But deposits have been growing at an even slower rate of 14.4%.

Chidambaram said the focus of the review meeting was on credit and deposit growth. "There is good credit demand from a few sectors such as agriculture, MSME and retail loans," he said, adding that in the infrastructure segment there is demand from roads sector and on the exports side there has been demand from segments such as textile, rice and tea.

"In housing, there are signs of growth especially from commercial real estate for residential purposes," he said. As per data from the National Housing Bank (NHB), there has been a growth of 14.53% in outstanding credit to housing loan in FY13.

Chidambaram said state-run banks are well-capitalised and except for IDBI (7.68%), Bank of Maharashtra (7.57%), Dena Bank (7.26%) and 
Indian Overseas BankBSE 2.09 % (7.80%), all banks have tier-I capital adequacy level of 8%.

"These four banks have been asked to submit a plan within the next month or so on how they plan to bring up their CRAR to 8% by the end of the year," he said, adding the government has allocated Rs 14,000 crore towards bank capitalisation. "The priority would be given to these four banks. They will also, of course, plough back some of the retail earnings. They will also find other ways to raise capital," he said.

Chidambaram further said commercial banks will open 8,000 new branches this year and hire over 50,000 people.