The Hindu Business Line : Some PSBs pitch for competition, not keen on fixing floor rates for loans

Discussions are on between banks to arrive at an understanding on indicative floor-level lending rates for both short-term and long-term loans to guard against the growing incidence of poaching of each other's accounts by undercutting of rates.

While some banks are pressing for reaching an understanding on the issue, heads of a cross-section of public sector banks told Business Line that despite the cut-throat competition it would be better for each bank to decide on its own pricing strategy based on its risk-taking ability.

"We don't want to reduce competition nor can we avoid competition in a liberalised environment. Moreover, competition is good for the borrowers. Each bank would have to decide on its lending rates based on the cost of funds and operating costs," the Chairman and Managing Director, Union Bank of India, Mr K. Cherian Varghese, said.

Mr Varghese said whoever is able to provide efficient and better service would be able to have a competitive edge in the market. "Borrowers want lower rates. Competition is good for borrowers," he said.

The debate on undercutting of rates is a fall-out of the Reserve Bank of India's desire that banks should price their risks properly. "We are having informal discussions only to ensure that we do not under-price ourselves. There is no such industry-wide understanding on lending rates," Mr Varghese said.

The Chairman and Managing Director, Vijaya Bank, Mr M.S. Kapur, also said that it was up to the individual banks to decide on their lending rates. "We have to decide our own pricing strategy depending on our internal risk assessment," he told Business Line.

However, Mr Kapur expressed serious reservation against tendency among banks to woo others' clients by offering ever-so sharp rates. "We are against this unhealthy practice," Mr Kapur said.

Mr K.N. Prithviraj, Chairman and Managing Director, Oriental Bank of Commerce, also said that no understanding had been reached among banks for a particular floor level on interest rates. "There is no understanding. What we need is mutual respect so that there is no unhealthy competition," he said.

Mr Prithviraj said that the concern among industry was to have "fair competition" and not the kind of "undercutting" that would harm the interest of the players. "We must realise that if a bank starts lending at 6-7 per cent, it would itself be finished in the long run," he said.

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