Rate cut may induce private lenders to slash lending rates
By Neelima Shankar
Mar 9, 2009
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Following the rate cut by the RBI, private sector banks in the industry are likely to follow their public peers. The private lenders in the industry are expected to slash down their interest rates.

Now that RBI has also reduced the key policy rates, private banks that have been hesitant to cut their rates are expected make a downward revision. The latest cut is expected to prompt these banks to take a move that would relive its borrowers.

HDFC Joint Managing Director, Renu Sud Karnad said, "We are intermediaries so by the time effective rates come down for us, there is always a lack of, may be a week, and so let's see what this reduction will mean for us for reducing our rates."

Since October, it is the fifth time that the RBI has cut the repo rate where as the reverse repo rate has been reduced thrice since then.

Until now, some of the government banks have reduced their lending rates. The largest lender, SBI has cut the home loan rates to 8% for the new borrowers. Even Canara Bank has lowered its rate to 8.25% for the first five years of the tenure. IDBI Bank and Union bank are also charging 9.25% for fixed rate home loan. On the other side, HDFC Bank is still charging 14% for its home loans.

The home loan market had been dominated by the private lenders but the recent changes are likely shift the trend. PSU banks have aggressively taking moves to capture the market and policy cut may support them on more such moves.

Finance Secretary Ashok Chawla said, "Over the last five months or so the policy rates have been cut every now and then depending on the requirement, as the situation unfolds and the requirement emerges, the RBI will take the steps and we are sure this will provide adequate impetus to the banks to lower their lending rates."

Following the announcement of rate cut, Union Bank of India and Bank of Baroda have decreased their benchmark prime lending rate (BPLR) by 50 basis points but these rates are effected with the commencement of new financial year.

In fact it is believed that most banks would keep their rates unchanged until the end of the ongoing fiscal. Allahabad Bank chief KR Kamath said, "RBI has given a strong signal for reducing rates. We will however wait for a while and see how other banks are reacting to this."

A top executive with Dena Bank said, "The decision on lending rate reduction will largely depend on how we manage our cost of funds. Our asset liability committee will take a call soon after examining the market condition."


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