The Telegraph
Since 1st March, 1999
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Rate rollback roller hardly rolls

Mumbai, Aug. 7: Union finance minister P. Chidambaram may bristle with rage: two of three nationalised banks today politely told the finance ministry that they would not be able to roll back the interest rate hikes that they announced early this month.

Bank of Baroda and Andhra Bank announced after their respective board meetings that there would no change in the prime lending rates (PLRs).

Delhi-based Oriental Bank of Commerce made a token revision by rolling back interest on home loans of up to Rs 20 lakh by half a percentage point to 9.25 per cent.

The Delhi-based bank said that interest on home loans above Rs 20 lakh would rise effective today to 9.75 per cent for a repayment tenure of up to 10 years and to 10 per cent for tenures above 10 years.

The board of another nationalised bank — State Bank of India (SBI) — is set to meet on August 24 to also reconsider the increase in interest rates that it had announced on August 1.

Banking circles expect SBI to also stand on its ground on the rate hikes. The finance ministry had directed nationalised banks to seek the approval from their boards before effecting any change in their lending rates.

This sparked consternation over the fact that the government, which had representatives on the boards of these banks, would force them to roll back the rate hikes. It was feared that this would not only undermine the operational freedom of these entities, but also depress their margins.

“However, it was good to see these bank boards ratifying their decisions. This should remove concerns about their independence. Bank stocks may look up tomorrow,” an analyst added.

Last month, the Reserve Bank of India (RBI) raised key short-term interest rates — the reverse repo and the repo rates — after its quarterly review of the monetary policy in an effort to rein in inflation.

The rate hike sent out a signal that interest rates would now harden. Coming on top of a similar and sudden quarter percentage point increase in the short-term rates on June 8, it was evident that the banks would also ratchet up their interest rates on loans.

However, three days after the hike, the special secretary (financial sector) in the finance ministry issued a note to nationalised banks asking them to focus on economic growth and subtly hinted that they should not raise lending rates to the productive sectors.

However, when four nationalised banks went ahead with interest rate hikes despite this note, an angry North Block issued a second note reprimanding them for not giving due weightage to its earlier communication. The ministry also told them to seek board approvals for any interest rate revisions.

It was in response to this directive that board meetings of the three banks were held today at the capital. While Andhra Bank and BoB ratified their revised PLRs amid “healthy deliberations’’ with the government nominee, Oriental Bank announced that only interest rates on housing loans below Rs 20 lakh would be reduced. This Delhi-based bank had announced an hefty 50 to 100 basis point hike in interest rates on home loans though its PLR was kept unchanged.

BoB today said while its benchmark prime lending rate (BPLR) would remain unchanged at 11.5 per cent, the directors explained certain developments to the government nominee. “The funding costs for the bank have been continuously rising and the bank has increased its deposit rates three times in last six months before the recent hike whereas the BPLR was raised only once earlier in May after a gap of over two years,” they said.

According to BoB, while most of the peer banks had a higher BPLR compared with its benchmark rate before the current hike, the increase would channel credit flows from sensitive sectors like commercial real estate to productive sectors as most of the lending to sensitive sectors is at the BPLR level or above.

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