PSU banks unlikely to go for higher rate cuts

19 June 2009

Public sector banks, burdened with expensive deposits raised at the peak of the credit crisis and rising bond yields, are unlikely now to fall to government pressure to further soften rates.

The government is seeking to adopt the measures that China and other Asian economies had introduced to lift the limits on bank lending in order to boost the economy.

According to analysts, profitability and margins of public sector banks could be under pressure particularly if specific Indian banks pursue a very aggressive growth strategy.

Meanwhile, shares in the State Bank of India gained 32 per cent this year, a figure that lags a 46 per cent gain in the bank index and a 57 per cent leap in shares of privately held ICICI Bank. About a quarter of all loans are controlled by SBI and its associates, and state-run banks control 55 per cent of all banking assets.

SBI slashed its deposit rate by 25 basis points as it reduced rates for a fourth time in 2009, but has not reduced its lending rate.

With the growth of bank loans slowing sharply, policy makers fear that the economic revival may suffer if the deep cuts in official rates are not passed on to the customers