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INDIA BUSINESS WORLD - November 16th December 31st 2008
SBI CUTS PLR BY .75%, DEPOSIT RATES BY 1%
INTEREST rates across the system are set to dip sharply from January with the country’s largest lender, State Bank of India (SBI), reducing its prime lending rate (PLR) by 75 basis points and deposit rates by 100 basis points. SBI has decided to peg its PLR at 12.25% and offer a peak rate of 9% on deposits.
SBI’s deposit rates have traditionally set the floor rates for the banking system, as the bank, with its network of over 9,000 branches, has been able to raise retail funds at the finest rates.
Following the cut, returns on deposits are now down to 4.75% at the short end of 15-45 days and 8.5% at the highest end. The special 1,000-day deposit scheme now returns 9% against 10% earlier. A positive fallout from the cut in PLR would be a reduction in existing rates on auto and education loans.
Earlier, Union Bank of India and Punjab National Bank cut their PLR to 12.5% each, which until SBI’s reduction was the lowest in the industry. A 3.5% cut in CRR and 100 basis point reduction in SLR requirement had resulted in surplus liquidity in the system. Besides, credit growth too had slowed down, which, in turn, forced banks to consider a reduction in lending and deposits rates.
The reduction in lending rates has come in the wake of RBI’s observation in its recently-released Trends and Progress report that though banks were quick to raise interest rates when monetary policy was tightened, they were slow to ease them when the policy was relaxed, hindering an easy passage of liquidity to borrowers.
“PSU banks are set to cut deposit and lending rates by about 100 to 150 basis points in January,” T S Narayanasami, chairman of Indian Banks’ Association, said.
With SBI announcing its deposit rate cut, its 1,000-day deposit scheme could see a rush of funds. The 10% return under this scheme is among the best in the system.
Until now, PSU banks have led the initiative of reducing lending rates to between 12.25% and 13.5% even as private banks continue to charge prime borrowers at around 15-17%. For instance, ICICI Bank’s PLR at 17.25% has remained unchanged since August this year.
When contacted, a senior ICICI Bank official said, “We see a downward trend in rates and, as such, will continue to watch the situation.”
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