Mumbai: Banks will be dropping lending and deposit rates, following the 50-basis point reduction in the small savings rate, to maintain the current spreads of around 3 per cent.

Says State Bank of India chairman Janki Ballabh: "There is a downward pressure on interest rates and the possibility of lending and deposit rates falling further cannot be ruled out. The 50-basis point cut in the small savings rate has given a clear indication that the rates are southward bound. But a reduction in PLR does not have much relevance, because banks are already lending at sub-PLR levels."

Says IDBI chairman and managing director P P Vora: "An immediate reduction in lending rates is probably not warranted. Most of our lending is long-term. But it is difficult to raise long-term resources from the market. The inherent term mismatch in borrowing and lending leaves little room for a reduction in lending rates. The conversion of old RBI loans into 20-year bonds does not reduce the cost of resources."

Says Bank of Baroda chairman and managing director P S Shenoy: "The budget is a good growth-oriented one. It has taken some hard decisions. As for lending rates being reduced, banks will first have to analyse their impact on earnings. Banks also have to examine the extent to which the tax relief on provisioning will help them before taking any decisions."

Says Bank of India executive director O N Singh: "Prime-lending rates of banks will definitely be reduced shortly, following the 50-basis point cut in the small savings rate."

Says Union Bank of India chairman and managing director V Leeladhar: "We expected a savings rate cut of 100-basis points. But the reduction has been only to the extent of 50-basis points. It is doubtful if banks will lower their prime lending rates, and I dont anticipate such a reduction anytime soon. There is some confusion over the tax relief on the provisioning of NPAs, which has been raised to 10 per cent from 5 per cent previously. Banks have to examine these issues before they can take a view on reducing lending rates."