NEWS & ADVICE : FIXED DEPOSITS
PSU banks lending rates fall behind the deposit rates
By Neelima Shankar
Dec 3, 2008
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The PSU banks in the country seem to be in an unusual situation as a mismatch between the deposit and lending rates has been noticed in the banks portfolios. The deposit rates of the banks are higher than the lending rates. In fact the difference is as high as 75 basis points in some cases and this is a condition that seldom occurs.

This inequality in rates is noticeable in banks such as Bank of India, Punjab National Bank and Indian Bank. For instance Bank of India has revised down their term deposit rates by 75 basis points and is offering 9.75% on its 1-year term deposits but its home loan of 5 years is charged a rate of 8.75%. At the same time the difference in other PSU banks is either negligible or not as much as it was at the time of the starting of credit crunch in September. This mismatch in the rates implies that banks' cost of raising funds is much higher than its cost of lending funds.

The PSU banks cut down their lending rates by 75 basis points following the finance ministry pressure after the cuts in RBI monetary tools. The cut in lending rate reduces the rates on home, education, personal loans and other loans but they could not decrease their deposit rates due to the higher deposit rates offered by private sector banks. The PSU banks however overlooked this difference between their cost of funds and revenue. This means that ultimately banks net interest margin would have an adverse effect and bad assets of the banks would pile up.

The lending rates have declined by 75 basis points but deposit rates have not declined by the same proportion or even remained at the same level. General Manager, credit of Punjab National Bank, LP Aggarwal said: "Home loan rates at 9% are not viable. Ideally, they should be priced much higher than 1-year deposits as the risk is high. But nationalized banks are not working only for profit motives, they also need to keep the public interest and welfare in mind. Therefore, home loan rates are being given at a concession."

However the public welfare argument would not be realistic from the long run prospective. A senior banker with a nationalized bank said, "The resetting (of rates) needs to happen. But until private banks reduce their deposits rates, we would be unable to do so." The country's largest lender, SBI has cut the deposit rates by 50 basis points, yet it is lower than the interest rate charged on various sorts of home loans. Earlier the banks use to charge150 basis points higher on lending as compared to deposit rates.


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