Public sector bank boards have stuck to their ground, and have not rolled back their rate hikes. Most PSU banks say that they will concentrate on lending below the prime lending rate to protect their margins, reports CNBC-TV18.

The boards of three PSU banks — Bank of Baroda, Oriental Bank of Commerce and Andhra Bank met in deference to the finance ministry's insistence but quite unexpectedly did not roll back the rate hikes announced by these banks last week.

"These letters were deliberated in great detail and we came to the conclusion that the rates will continue," said K Ramakrishnan, CMD, Andhra Bank. Oriental Bank of Commerce rolled back the increase in home loan rates below Rs20 lakhs, but retained the hike for loans above that amount.

What makes these board ratifications noteworthy is the circumstances under which the boards met. On July 25 the RBI signaled higher rates, by raising the repo rates. On July 28, the finance ministry sent a note to all PSU banks asking them to focus on economic growth and hinting that a need to reprice loans to productive sectors may not be necessary.

Come August 1, five major PSU banks nevertheless announced rate hikes. This drew a second stern note from the ministry of finance to all banks chiding them for not giving due weightage to the letter of July 28 and asking them to place the letter and the hikes before their boards once again for reconsideration.

There was speculation that that the government nominees would steamroll their majority and roll back the rate hike decision, thus making a mockery of commercial banking and of the RBI's effort to cool the economy.

Surprisingly, however, the boards have chosen to stay with the rate increase decision. Yet, Bank of Baroda's press release clarifies, "The board reiterated its resolve to channel more credit into productive sectors and away from segments like realty."

All eyes are now on the State Bank of India, in which the Reserve Bank of India is the majority shareholder, which too has implemented its 0.25 per cent PLR hike. Its board is only scheduled to meet on August 24 to reconsider the rate hike, but now the odds are that SBI, too, would follow the example of its peers.