The Hindu Business Line : PSU bankers `surprised'

The Finance Ministry's letter to some public sector banks asking them to get their board approval for the recent rate hikes has surprised many bankers here.

A senior bank official said the recent increase in interest rates by banks actually followed the RBI's hike in its key short-term rates. Banks have to match their lending rates with their cost of funds.

Interest rates revision

Normally, the Asset Liability Committee (ALCO) of the bank is empowered by the board to take the decision on revision in interest rates. The ALCO comprises senior bank officials and is usually chaired by either the Chairman or the Executive Director of the bank.

Why is the Finance Ministry then insisting on the mandatory prior approval of board before the rate hike, the official asked.

"Technically, the Government cannot ask PSU banks not to hike interest rates because some members on the board may oppose it saying it will hurt the bank's bottom line. All PSU banks may not have deep pockets to absorb the increase in cost of funds. Somebody has to foot the bill," said a senior official of a public sector bank.

Lending rate hike

With deposit rates rising, banks are left with almost no other option but to hike lending rates in order to maintain their margins.

"Regulation of interest rates does not hold much logic. If banks' margins take a hit due to the rising interest rates, then the Government will once again hold banks responsible for their poor performance," said another senior bank official.

Board approval

Chairmen of most public sector banks were not willing to comment on the Finance Ministry's letter. Banks that have yet to hike the rates may now go in for board approval.

"There is nothing wrong in obtaining the board's okay for hikes in rates as the board members would represent various fields. In any case, the Government as the owner has the responsibility of managing not only the bank, but also the economy. Nationalised banks have a certain level of corporate social responsibility," said an official from a public sector bank, which is yet to raise rates.

This week, six public sector banks - State Bank of India, Punjab National Bank, Bank of Baroda, Syndicate Bank, Andhra Bank and Oriental Bank of Commerce - have announced a hike in their lending rates and home loan rates by 25 basis points. This is following the 25 basis points hike in key short-term rates by Reserve Bank of India in the quarterly review of the monetary policy.

The PLR for these banks is between 11-11.5 per cent as of now and average floating home loan rates are between 9.25 to 10 per cent. Average rates for long-term deposits have also increased to around 8 per cent after the recent hikes.