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Tuesday, Apr 06, 2004

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IBA may seek 50 basis point cut in SB account rate

Vinson Kurian

Thiruvananthapuram , April 5

THE Indian Banks' Association (IBA) is meeting on April 19 to finalise its recommendations in the run-up to the Reserve Bank of India's `Annual Policy Statement' (erstwhile `Credit Policy'), due a month from now.

Speaking to Business Line, Mr S.C. Gupta, Chairman and Managing Director, Indian Overseas Bank (IOB), said that Chief Executives of banks might possibly recommend a cut in interest rate on savings bank accounts.

According to him, the IBA would seek a cut of 50 basis points in the rate to three per cent.

On whether IBA has crystallised a line of thinking on deregulating savings bank rate structure, Mr Gupta said that at no point of time has the issue been raised.

"We did make a demand sometime back that the savings bank interest rate be reduced from four per cent to 3.5 per cent. After being rebuffed on two earlier occasions, we received a favourable response the last time when the rate was actually brought down."

But the interesting aspect about the issue is that it is the private and foreign banks that desperately want savings bank rates to be deregulated. "That is not generally the case with the public sector banks, which control 80 per cent of the banking business," Mr Gupta said.

As for outlook on rates, he said that interest on deposits had already bottomed out. Lending rates behave as they do due to overhang of liquidity.

Demand and supply factors are bringing a lot of pressure to bear on the rate structure.

Various segments of industry, trade and exporters have already shifted loyalties on the basis of floor rate of interest.

Those banks with larger amounts of liquidity at their disposal resort to under-cutting of rates. "This is something which even we had to suffer from, especially with borrowers whose demand for reduction in the rate was not immediately conceded by us," Mr Gupta said.

"But this kind of competition, which may look otherwise unhealthy, is indeed healthy for the industry. It also goes to make the financial system benchmark itself creditably with what is obtaining internationally."

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