The Hindu Business Line : Conflicting signals

The Finance Ministry's directive asking public sector banks (PSBs) to seek their board's approval for raising the prime lending rate (PLR) may well be termed a regressive move. After all, just two weeks ago, the Finance Minister, Mr P. Chidambaram, had urged the PSBs to get rid of the mental block against consolidation and prepare themselves for a transformation. According to the regulations, banks are free to price their deposits and loans, except savings bank accounts and agriculture loans. Further, the Asset Liability Committee of banks is empowered by the boards to revise interest rates as and when the situation demands. The Finance Ministry's intervention in such matters is only likely to stifle the autonomy of the banks and defeat the purpose of making PSBs competitive.

The hardening of interest rates has forced banks to revise their deposit rates upwards, putting pressure on their cost of working funds. In this backdrop, the Ministry's missive may prove a disadvantage, impacting their margins. The Finance Minister's defence that the Government is a majority stakeholder in these banks and, hence, has a right to issue such a directive is merely a technicality.

Radhika Kamath

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