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State Bank, Bank of Baroda cut lending rate

The country's premier commercial bank, the State Bank of India, on Wednesday announced a medium-term lending rate for term loans of three years and above, and reduced its prime lending rate from 13.5 to 13 per cent with effect from November 1.

Earlier, Bank of Baroda announced a similar reduction in its PLR to 13 per cent. The rate cuts follow the announcement of the Reserve Bank of India's credit policy for the busy season.

State Bank of India Chairman M S Verma said that the MTLR would be anchored with the bank rate at a margin of 3.75 per cent and the present rate being worked out at 12.75 per cent. The MTLR would be the indicator of the rate of which debt funds would be available to the entrepreneurs for making medium- and long term investments and would represent the bank's assessment of the movement of the long-term interest rate, he said.

While looking at a long-term floating rate in the near future. Verma clarified that the bank would consider proposals from its clients who want a fixed-medium and long-term interest rates on borrowings for their projects so that they would assess the outflow of their funds towards payment of interest.

However, such fixed rates availability would depend on the quality of risks involved in the projects, maturity of loans and project size.

In long-term funding, the bank's spread will be around 2.5-3 per cent.

The State Bank also revised downward its deposit rates for maturity periods by an average of 0.50 to one percentage points and clubbed the short term 30-46 and 46-179 days maturity periods into one of 30-179 day, bringing down the rate of five per cent.

Similarly, for the periods of 180 days and up to the one year, over one year and up to two years, over two years and up to three years, and over three years deposits, the rates were revised respectively to 7.50, 10, 10.50 and 11.50 per cent from the previous levels of 9, 10.5, 11.5 and 12 per cent.

While the Bank of Baroda reduced its lending rate from 13.5 to 12.5 per cent in respect of the retail borrowers in the credit slab of over Rs 25,000 and up to Rs 200,000, the State Bank decided to wait further to take a decision in this respect.

The Bank of Baroda also reviewed various aspects of its policy measures arising out of the new credit policy and would shortly announce a long-term prime lending rate for its clients in the near future.

Meanwhile, sources in Citibank, the largest foreign bank in India, and Bank of India, said that their respective banks would take a decision on Thursday on lowering of their prime lending rates as well as deposits rates. On Tuesday, ANZ Grindlays Bank cut its prime rate by one percentage point to 14.5 per cent just after the announcement of RBI credit policy.

Asked about the current state of the Indian economy, the State Bank chairman said that there were strong indications of credit pick-ups in the second half of the fiscal year particularly in light of huge availability of funds at lower interest rates.

As on September 30, the credit disbursal of the State Bank was in the range of Rs 45 billion which includes non-food credit of Rs 15 billion, and this is likely to be doubled in the next six months of the year. During the same period, deposits growth was to the extent of Rs 70 billion.

Expecting a boost in credit pick-up in the project related areas where need for funds is comparatively for long periods, Verma said the maximum interest spread had been reduced to 3.50 per cent from the existing level of 3.75 per cent. This will not apply to consumer credits.

On non-resident external account deposits, the bank fixed the interest rates on its own market perception such as six months and up to one year at 7.50 per cent, above one year and up to three years at 10.50 per cent, and above three years at 11.50 per cent.

Under the NRNR scheme, the interest rates for six months and up to one year was fixed at 11 per cent and over one year and up to three years at 12 per cent, bringing nearer to rupee domestic saving scheme.

The Bank of Baroda board also deliberated on the issues of deploying its resources effectively for productive purposes of the economy and finding areas to boost credit flow from the bank. It also discussed the possibility of identifying a base rate for the bank to float a long-term prime lending rate in the future.

According to the weekly Debt Market Update of the ICICI Securities and Finance Company Ltd, the busy season credit policy will ensure that interest rates across the credit and maturity spectrum decline by 50 to 100 basis points from the pre-policy levels.

The decline in interest rates will not be restricted by an oversupply of stock since the central government has completed 90 per cent and state governments have completed 100 per cent of their borrowing requirements.

The reduction of interest rates will lead to a larger quantum of funds being made available to the corporate sector.

The phased reductions of cash reserve ratio by two per cent over the next five months in 0.25 per cent instalments will ensure adequate flow of lendable resource for banks and keep interest rates soft during the second half of 1997- 98.

Meanwhile, Indian Merchants' Chamber President Ram P Gandhi on Wednesday said that the new monetary and credit policy has shifted the onus for enhanced and timely credit delivery entirely on the shoulders of the banks who are allowed to reduce the interest rates and increase the credit flows to the trade, auto finance, and services, including housing sectors.

On reinforcement of the credit delivery system, Gandhi said the Union ministry of finance should immediately take some complementary measures particularly to change the mindset of bank officials and minimise the unwarranted witch-hunting of bona fide action of bankers. Bankers should be encouraged to take upright and conscientious decisions in a bona fide manner free from fear psychosis.

The new policy has also left some major areas for disappointment, said Gandhi. Most prominent was the ceiling of Rs 1 million for borrowing against investment in equity shares should be lifted. Also bridge loans should be permitted to exceed the ceiling of five per cent of incremental deposits prescribed for banks investments in shares.

At present, loans to individuals against shares debentures and bonds are subject to a minimum margin of 50 per cent. But now RBI has given the liberty to banks to stipulate margins on loans to individuals against only preference shares, debentures and bonds.

UNI