PSU banks reducing interest rates on consumer loans

Senior officials of the public sector banks (PSBs) informed that banks are working on the process of cutting down the interest rates on consumer loans (home, education and auto) by another 50 to 100 basis points.

There is low demand for corporate loans therefore banks are having a cash surplus of Rs 1.60 lakh crore, which they desire to lend to retail borrowers.

A banker told, “Sluggish demand from the companies gives us ample scope to grow the retail assets, which until now the public sector banks were slow to grow”.

Over the next month the banks will be reducing the benchmark lending rates for best customers by 25 to 100 basis points. Currently, the benchmark lending rates of PSBs range between 11 per cent and 12.25 per cent.

A senior SBI official informed, “State Bank of India (SBI) is likely to revise its benchmark lending rate for best customers by at least 25 to 50 basis points from the present 12.25 per cent”.

In December 27 public sector banks jointly announced to market the special home loan package but most of the banks are not interested in this it is compulsory to fix the interest rate for the first five year. In its place the banks are dedicated to lower floating interest rates. While home loans on floating rates are likely to be cheaper by 100 basis points.

A senior IDBI Bank official explained, “With rates falling below the floor rate of 9.25 per cent announced in the special home loan package, the package is losing relevance. All further rate reductions can only be kept floating. We have a head room of reducing rates by another 50 basis points”.

Under the special home loan package interest rates were fixed at 8.5 per cent for loans up to Rs 5 lakh and at 9.25 per cent for loans up to Rs 20 lakh for a period of five years. PSBs are also offering free insurance cover for the loan and waiver of pre-penalty charges.

SBI and Canara Bank have already announced the home loan package, with rates at 8 per cent and 8.25 per cent, respectively. These rates are being offered on loans up to Rs 30 lakh (the priority sector lending limit under Basel II norms, earlier this limit was Rs 20 lakh).

A senior Canara Bank official informed, “We have headroom to reduce our benchmark rate by 50-100 basis points. All our retail products are priced almost on a par with SBI. The rate of 8.25 per cent is for home loans up to Rs 30 lakh. But we may cut rates depending on the competition”.

On the other hand Punjab National Bank has reduced its benchmark lending rate by 50 basis points to 11 per cent from May 1 -- the lowest in the industry.

PSBs are also planning to cut down their deposit rates further. On Saturday SBI announced cut down in deposit rates by 25 basis points. After the renewal the rate for its 1,000- day deposit scheme is 8 per cent, 150 basis points less than what it was offering till December 1, 2008. Thus the interest rate for its one-year deposit is now 7.70 per cent.

Most of the banks are in the process of consistently bringing down dependence on high-cost bulk deposits. Bulk deposits have dropped to less than 10 per cent of total deposits. The share of bulk deposits in the total deposits of Bank of India, for example, is only 6.5 per cent.

Moreover the cost of funds is also dropping, with most banks depending on the low-cost CASA (current account and savings account).