Banks may stick to rate hikes

Boards of 3 banks meet today; deposit rates may go up too.

The boards of three public sector banks that are meeting tomorrow are expected to ratify the increase in their prime lending rates (PLRs).

Sources close to the developments said the government nominees on the boards, who will play a key role in the outcome of the meetings, are unlikely to press for a rollback of the PLR hike. However, they would press for a deposit rate hike by these banks.

The board meetings of the three banks "" Bank of Baroda (BoB), Oriental Bank of Commerce, and Andhra Bank "" will be held in the capital.

The government nominee on the BoB board is Banking Secretary Vinod Rai. The two bureaucrats on the boards of OBC and Andhra Bank are Rakesh Singh and P Bolina.

The boards are meeting following the directive of the finance ministry to review the recent hike in PLRs by banks. Apart from BoB, OBC and Andhra Bank, State Bank of India (SBI), and Punjab National Bank have hiked their PLRs, while others have been waiting to do so.

The brass of the public sector banks are keeping a close watch on the stand the finance ministry's representatives take at the board meetings.

The decision that these three boards take will set the agenda for the entire banking industry on tackling the issue of protecting margins in a market where the cost of resources is rising.

Some bankers said they were planning to bring down the profitability targets projected for 2006-07 in the statements of intent submitted to the finance ministry if they were not allowed to hike the PLR.

"If we are not allowed to take commercial decisions, how do we achieve the profitability targets? We do not have any choice but to pare the targets," said a bank chairman.

Most of the banks have already signed with the finance ministry letters of intent setting out their targets for 2006-07, and a few are in the process of doing so. Of the 16 major performance parameters outlined in the statement of intent, six are related to profitability.

They are net profit, return on assets, return on net worth, earning per share, net interest margin, and cost income ratio.

Any restriction on raising lending rates will force banks to modify their advances and deposits growth targets, as well as profit targets.

In 2005-06, only Indian Overseas Bank fulfilled promises made on all the 16 parameters. Indian Bank and Punjab & Sind Bank met 15 targets, Bank of Baroda, Canara Bank, and State Bank of Hyderabad, 11, and State Bank of India, Union Bank of India, Dena Bank, and Allahabad Bank, only eight. The rest were able to meet only 1-7 of the agreed performance targets.