Ministry asks PSU banks to roll back rate hike

RBI kept in the dark about North Block move; banks' margins under pressure.

In a surprising move, the finance ministry today directed public sector banks to keep in abeyance the hike in their prime lending rates (PLRs).

Signed by Joint Secretary (banking) Amitabh Verma and faxed to the CEOs of some of the public sector banks that hiked their PLRs over the last few days, a ministry note asked them to keep the rate hike "in abeyance until the matter is considered" by their boards.

At least five public sector banks, led by the State Bank of India (SBI), had hiked their PLRs, in the range of a quarter to half a percentage point.

The list included Punjab National Bank (PNB), Bank of Baroda (BoB), Oriental Bank of Commerce (OBC), and Andhra Bank. The rest of the public sector banking industry would have hiked the rates by this weekend, though this is unlikely to happen now.

The North Block has not discussed the issue with RBI Governor YV Reddy.

The ministry's letter has stunned bankers as 15 of the 19 PSU banks, as well as SBI, are listed entities answerable to their shareholders.

The government stake in Andhra Bank, OBC, and Dena Bank is just above 51 per cent, and it is between 53 per cent and 58 per cent in PNB, BoB and a few others.

The SBI is not owned by the government. It is owned by the Reserve Bank of India (RBI), which holds a 59.73 per cent stake in the country's largest commercial bank.

"The government has virtually asked us to roll back the rate hike. How can we go back to the board, which has already ratified the hike? In case of some banks, the rate hike decision is taken by their asset-liability committees, which enjoy the mandate of the board for taking such actions," said a bank chairman under condition of anonymity.

At a meeting with PSU bankers on July 21, Finance Minister P Chidambaram had asked them to be ready for a rate hike by the central bank.

Following the RBI's reverse repo rate hike in the last week of July, Banking Secretary Vinod Rai sent a note to the PSU banks, projecting to them a larger picture of the economy, and asking them to meet the productive credit needs.

A source in the capital said there had been intense discussions within the finance ministry over the last few days, and the directive was ultimately sent as it was felt that the government, being the owner of PSU banks, had the right to do so.

"This highlights the micro management of banks by the government. It will not go down well with the large investing community, and the global rating agencies. We cannot talk about reforms in the financial sector and direct banks not to hike their lending rates," said an international banking consultant. The banks plan to discuss the ministry directive at the Indian Banks' Association forum soon.