Reducing interest rates difficult for PSU Banks
By Joseph Samson
Jan 7, 2008
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New Delhi: Implementing the Finance Minister's suggestion to reduce the lending rates by 0.5 percentage points won't be easy at all for the Public Sector Banks. The hike in cash reserve ratio (CRR) by the Reserve Bank of India (RBI) had put pressure on liquidity condition and increased the cost of funds for banks. The growth in credit lending was also not very impressive during the last year due to high interest rates prevailing in the markets.

Finance Minister had asked the banks to reduce interest rate at a meeting with the chief executives held on Friday for reviewing the performance of various public sector banks during last quarter. Stating that since, the RBI hadn't touched other rates except the CRR, which was basically to mop up the excess liquidity in the system, banks have no reason to increase rates. On the other hand if they reduce rates, it will help the entire system in general.

Though, the banks are under tremendous pressure to perform and meet their credit goals, bankers feel that there is very little scope for such a reduction with inflation still tending towards the higher side and rising oil prices expected to put further pressure on it. On lending to corporates at lower rates, bankers say that they are already giving loans to them at discounted rates. Moreover, since the end of this year is near, they might have exhausted their budgetary allocations and wouldn't like to take more loans.

It will definitely be a difficult decision for the banks to heed to the Finance Ministers request. The asset liability management committees of major public sector banks is expected to meet soon and arrive at some decision.

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