The Hindu Business Line : PLR hike: Banks in a fix

Rate woes
Leading bankers said they were getting contradictory cues from the Reserve Bank and the Finance Ministry.
The former indicating hardening interest rates to curb liquidity while the Ministry was for a benign interest regime to encourage economic growth.

New Delhi , Aug. 5

Public sector banks have run into a problem with the latest missive from the Finance Ministry advising them to seek board consultation before hiking their lending rates. Speaking to Business Line on condition of anonymity, leading bankers said they were getting contradictory cues from the Reserve Bank and the Finance Ministry with the former indicating hardening interest rates to curb liquidity while the Ministry was for a benign interest regime to encourage economic growth.

The bankers also said that any move to prevent PSU banks from hiking lending rates would only erode their profitability in a hardening deposit rate environment.

The RBI has given two strong signals in a short period of time to hike lending rates. On June 8 and again on July 25, the monetary authority raised the repo and reverse repo rates by 25 basis points, indicating that it was raising the rates for its lending toand borrowing from banks. Additionally, inflationary concerns arising from the partial pass through of the oil price hike to consumers have led bankers to forecast a scenario where cost of funds would go up. "Government borrowing is high, credit demand is high. So banks see constraints of funds and already funding cost is high. Therefore, most banks want to increase lending rates," a leading banker said.

"If PSU banks are forced to hold on to their lending rates and if they want to maintain profitability, they would have to retain deposit rates at current levels. Then they run the risk of losing more market share as they will not be able to match the deposit rates offered by private and foreign banks. PSU banks are competing with their hands tied and that is why they have lost over 20 per cent market share in deposit mobilisation over the last 12-13 years," another banker told Business Line.

Incidentally, the Punjab National Bank today announced a hike in deposit rates across various maturities. PNB had, earlier in the week, raised lending rates as well.

Bankers also point out that PSU banks' revenue streams are taking a hit on account of recent decisions such as doing away with interest on CRR balances, hike in reverse repo rates and difficult conditions for making treasury profits in the wake of hardening yield in government paper.

Some economists Business Line spoke to said that different objectives of the RBI and the Government were becoming evident. The monetary authority has expressed concern at the inflationary potential and has said in the latest policy review that containing inflation within the range of 5-5.5 per cent "warrants appropriate priority in policy responses."

In this context, it has said that money supply on a year-on-year basis reflected a growth of 18.8 per cent by July 7 this year, sharply higher than 13.8 per cent a year ago. This was above the projected 15 per cent growth indicated in the annual policy statement.

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