The Telegraph
Since 1st March, 1999
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Banks rush to put on rate rethink cap

Aug. 4: Leading public sector banks are calling hurried meetings of their boards to reconsider a hike in interest rates that they announced just three days ago.

The review follows a directive sent out by the finance ministry asking banks to seek approval from their boards before ratcheting up their prime lending rates (PLRs).

But the move sparked consternation in banking circles over what is seen as blatant interference by the government after having extended a measure of autonomy to banks. The present regulations permit banks to freely price their loans and deposits except the savings bank rate, which is capped at 3.5 per cent and agriculture loans.

But finance minister P. Chidambaram brushed away all criticism. “Yes, we have advised the banks that a decision to raise the rate of interest has to be taken by the respective boards. What is wrong with that'”

On August 1, the State Bank of India and Punjab National Bank raised their PLRs by quarter of a percentage point to 11 per cent and 11.5 per cent, respectively. Both banks also raised their home loan rates by 25 to 50 basis points. One basis point is one hundredth of a percentage point.

A day later, Oriental Bank of Commerce also raised its interest rate on home loans by 50 to 100 basis points.

These hikes were in response to the Reserve Bank of India’s decision to raise key short-term interest rates on July 25.

The banks had raised the rates after a decision was taken by their asset liability committees (ALCOs). This is traditionally the way that banks decide on rate rises. The committees compare the cost at which they hold assets (basically the loans they give out to customers) with the cost of liabilities (largely deposits that customers park with them) and then decide on a rate tweak.

SBI chairman Om Prakash Bhatt said, “The board will meet next week. The board will decide on whether or not the prime lending rates should be lowered.”

The banks were unwilling to say whether the review meant an automatic cut in the PLR. “I can’t say right now whether the rate hike will be rolled back or not,” said Bank of Baroda chairman A.K. Khandelwal. “A decision on this will be taken at the board meeting next week.”

However, there was some confusion over whether some of the banks had already taken permission from their boards before they raised their rates.

“Decisions to raise crucial rates like the prime lending rate are taken after obtaining the approval of the board. This time also they must have done that,” said one PNB official on condition of anonymity.

It wasn’t clear whether PNB’s board had cleared the proposal at a formal meeting and whether it would meet again in the light of the ministry’s directive.

“In the past, whenever we raised our prime lending rate, we did it with the approval of the board of directors,” said K.N. Prithviraj, chairman and managing director of Oriental Bank of Commerce, which didn’t raise the PLR this time.

However, OBC has decided to put its home loan rate hike on hold. “We will take it to the board of directors next week and a decision will be taken,” Prithviraj said.

If the PLR rates go down, people who have taken home loans, personal loans or auto loans may be spared an increase in their existing interest rates. Even the existing floating home loan rates may not rise.

The bank scrips today bore the brunt of the finance ministry’s decision. All the PSU banks ended the day in red and dragged down the BSE Bankex by 72.47 points or 1.5 per cent, which ended the day at 4,773.04.

State Bank of India lost Rs 22.20 or 2.67 per cent to end at Rs 807.90, while PNB lost 4.19 per cent or Rs 16.10 to settle at Rs 368.60. Allahabad Bank, Indian Overseas Bank, Oriental Bank of Commerce and Dena Bank also lost.

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