Public sector banks have suddenly developed cold feet on raising lending rates even if it means sacrificing on their bottom lines.
While ruling out any government intervention, senior executives in four public sector banks that Business Standard spoke to said they are analysing the impact that an increase in interest rates will have on the borrowers — especially the small and medium-sized companies and those who have availed of retail loans.
“We have to bear in mind the implications of a rise on the absorptive capacity of the borrowers. Some of them may be ready for an increase in rates but it may also raise the risk of default,” said a public sector bank executive.
Last Tuesday, the Reserve Bank of India (RBI) had raised the cash reserve ratio by 25 basis points and the repo rate, or the rate at which it lends to banks, by 50 basis points. With the CRR increase due on August 30, both the rates will touch 9 per cent. The move was aimed at taming inflation by moderating credit demand.
In the past, the finance ministry has often asked banks to absorb the increase, if not reverse a hike. But a senior government official said that this time there have been no missives to public sector bank chiefs. “But yes, they are aware of our concern on growth and we expect them to factor it in when they decide on a rate hike,” the source said.
So far, only Punjab National Bank, IDBI Bank and Punjab & Sind Bank have increased prime lending rates, while most banks have left rates unchanged. Central Bank of India has announced an increase but not effected the hike, while Oriental Bank of Commerce and Bank of India have only raised the deposit rate for certain maturities.
Finance Minister P Chidambaram is due to meet the 28 state-run bank chiefs on August 13 and some bankers may opt to wait for a week to take a cue from the majority shareholder before effecting a rate hike.
A discussion on RBI’s first quarter review of monetary policy is bound to take place though the meeting has ostensibly been called to review the first quarter performance and the farm debt waiver scheme, a source said.
