Autonomy of banks not curtailed: Finance Ministry

The finance ministry is emphatic that it did not undermine public sector banks' (PSBs) autonomy through its recent communication on interest rate hike to public sector banks under its control.

Stating this, a finance ministry official said the issues raised were more related to governance.

"We have a right to be heard," the official emphasised, drawing attention to the government's majority shareholding in public sector banks.

The thrust in the government's communication last week to PSBs was the need to have a governing board discussion on effecting an interest rate hike, he added.

Officials said nothing extraordinary should be read into the Reserve Bank representatives not attending the board meetings of three PSBs "" Andhra Bank, OBC and Bank of Baroda "" here on Monday.

They added that the RBI representatives concerned might have had a mundane reason for missing the board meeting, in the same manner as the government representative on Andhra Bank missed the meeting due to other commitments.

Last week, a written communication from the finance ministry to PSBs triggered questions about the extent of autonomy the banks enjoy on operational decisions.

After the communication, the governing boards of Bank of Baroda and Andhra Bank met this week to ratify an earlier decision to hike the benchmark prime lending rate by 50 basis points (one hundredth of a percentage point). Oriental Bank of Commerce decided to partially dilute a decision to hike home loan rates after a governing board meeting.

The government's view was that some of the banks may have "mechanically" hiked interest rates in the wake of the Reserve Bank's decision to hike repo rates in phases. The underlying reasons for a hike in interest rates by banks needed to be discussed by the governing board.

The government's view had an impact on Oriental Bank's earlier decision to hike home loan rates.

"We have to come with some more justification," explained Oriental Bank's Chairman and Managing Director KN Prithviraj after the bank's governing board suggested the decision to hike home loan rates be kept in partial abeyance.

Oriental Bank decided to temporarily suspend the decision to hike home loan rates for home loans below Rs 20 lakh. Prithviraj said the bank's Asset Liability Committee (ALCO) would take another look at the interest rate of home loans below Rs 20 lakh on September 30.

PSBs have certain social objectives and need to take a long-term view. The decisions taken by the governing boards of three PSBs earlier in the week indicated that autonomy of their governing boards stands established, the finance ministry official said.