PSU banks set to hike rates

PLR hike on tight liquidity, say banks' chairmen.

Public sector banks, which account for about 75 per cent of the banking industry, are finally bracing for raising their prime lending rates (PLRs) next month. The increase in PLRs will lead to an increase in lending rates across the board, including for home loans and corporate loans.

At a meeting with Finance Minister P Chidambaram in New Delhi today, bank chairmen made it clear that they had no choice but to hike their PLRs in the face of tight liquidity.

Chidambaram, who had earlier "requested" the banks to refrain from any rate hike until the end of financial year 2005-06, did not repeat his request this time.

"The finance minister has understood and appreciated our stance. He has told us to discuss the issue with the Reserve Bank of India and resolve the liquidity issue. Some of the senior bankers will meet RBI officials next week," said a bank chief who attended the meeting.

All public sector bank chiefs, except for the chairman of Bank of Maharashtra, attended the meeting where they made a strong pitch for a cut in banks' cash reserve ratio to release liquidity into the system.

The PLRs of public sector banks currently range between 10.25 and 10.75 per cent and have not been revised for more than a year. The deposit rates have, on the contrary, been increased by as much as 200 basis points since January 2006. The increase in PLRs is likely to be in a range of 50 basis points to 100 basis points, depending on the pressure on interest margins.

The bank chiefs also urged the finance minister to impress upon public sector undertakings to park deposits with their banks to help them raise their kitty.

Another proposal was to allow banks to borrow overseas through the external commercial borrowing route to meet the increasing credit demand. At present, banks are allowed to borrow overseas up to 25 per cent of their net-owned funds.

Banks are desperate for funds and are raising resources at very high rates.

Some banks have even raised deposits for 45-60 days at rates as high as 9 per cent, which till recently were less than 6 per cent. The RBI has, in recent times, been injecting Rs 15,000 crore to Rs 20,000 crore daily into the banking system through the repo (re-purchase) window.

But this window can be accessed only by banks which have investments in SLR securities sufficiently above the statutory liquidity ratio (SLR) of 25 per cent.

"With the credit portfolio rising at over 30 per cent annually and the deposit liability increasing by 17 per cent, there can be a over-Rs 1 lakh crore liquidity gap in the next fiscal year. We must find out ways to bridge the gap," said another banker.

The public sector banks have not hiked their PLRs even as the RBI hiked its short-term reverse repo and repo rates by 50 basis points (one basis point is one hundredth of a percentage point) each in two stages to 5.5 per cent and 6.5 per cent between October last year and January even as it left the bank rate untouched at 6 per cent.

The reverse repo is a mechanism through which the RBI sucks out liquidity from the system while the repo is used to pump in liquidity.

In the private sector, ICICI Bank has hiked its PLR by 175 basis points to 12.75 per cent in three stages since January. Housing finance major Housing Development Finance Corporation has hiked its home loan rate by 50 basis points and is about to raise it by another 50 basis points from April 1.

In the public sector, most of the banks, including State Bank of India, have hiked their corporate as well as retail lending rates by 100 to 150 basis points over the last two months.

But this was done without raising their PLRs. In other words, all new loans are attracting higher rates, while the old loans could not be re-priced since the PLR remained untouched.