Banks listen to the master's voice

Rate hike kept in abeyance; boards in rush to hold meetings.

The finance ministry's show of authority has worked. A clutch of public sector banks, led by the State Bank of India (SBI), today rushed to finalise dates for holding board meetings, keeping in abeyance the hike in their prime lending rates (PLRs).

However, it is not known whether the rate hike decision will be rolled back. A source in Delhi said that after all the noises made, the bank boards might give the go-ahead for the rate hike, and the finance ministry not push for a rollback.

Bank of Baroda, Andhra Bank, and Oriental Bank of Commerce will hold their board meetings on August 7. SBI has not yet finalised the date, but will hold the meeting next week to take a relook at the rate hike.

A senior Punjab National Bank official said it had hiked rates only after obtaining permission from its board, making it compliant with the finance ministry's directive.

The Indian Banks' Association (IBA) will also hold its crucial management committee meeting on August 11 to take stock of the situation.

On a day of high drama, when PSU bank stocks fell by over 3 per cent and the bank CEOs kept their lips sealed, Finance Minister P Chidambaram defended the ministry's directive, saying a decision on the rate increase had to be taken by the boards of the banks, and not by their asset liability committees (ALCOs).

The ALCOs have been deciding on rate hikes till now, based on authorisation from the boards of directors.

Chidambaram said since the government had majority stakes in the banks and there were government nominees on their boards, it was right for the finance ministry to advise them on interest rate hikes.

The banks have frozen all new loan contracts that they were to sign over the next few days.

"As we do not know what will be the fate of the rate hike, we cannot sign fresh loan agreements till the board meeting takes place," said a banker. They are also going slow on raising deposit rates as this will bring their net interest margin under further pressure, without an increase in lending rates.

A finance ministry directive had yesterday asked these banks to keep the hike in their PLRs in abeyance till their boards took a look at the rise in rates.

Five PSU banks have hiked their PLR by between a quarter and half a percentage point to 11.50 per cent. None of the CEOs of these five banks were willing to talk on any possible reversal of the decision by their boards.

Industry sources said the government nominees on the boards, carrying the mandate of the ministry, would push for a reversal of the rate hike. The government nominee in SBI is Ashok Jha, while Vinod Rai is on the board of BoB, Rakesh Singh, on Andhra Bank, and P Bolina is on the board of OBC.

The finance ministry's directive yesterday followed veiled caution against rate hikes by public sector banks in a letter written on July 28. The letter had stated that any rate decision should take into account the ample liquidity conditions, and that the board of directors should be kept informed.

About 60-70 per cent of the loan portfolios of most public sector banks are linked to their respective PLRs, and an increase in rates would have helped them protect their margins in a scenario where the cost of resources is rising fast.