PNB sees scope for 50-100 bps cut in interest rates

At least one nationalised bank has admitted there exists scope for further reduction in interest rates even as several major banks and the Indian Banks Association have ruled out further reduction in lending rates.

Punjab National Bank (PNB), the second biggest public sector lender after the State Bank of India, has said there is scope to bring down interest rates by another 50-100 basis points.

"There is headroom for another 50 basis points cut, K C Chakrabarty, chairman and managing director of the bank said, adding, ''If I can bring down deposit rates, there is case for 100 basis points cut."

Chakrabarty's comments follow the Reserve Bank of India's strong message to banks that there are inadequacies in the manner in which interest rates on loans are fixed.

The RBI in its annual monetary and credit policy had faulted the evolution of the current benchmark prime-lending rate (BPLR) system followed by most banks and had announced the setting up of a working committee to review the system.

''The system of BPLR has evolved in such a manner that it has lost its relevance as a meaningful reference rate as bulk of loans are advanced below BPLR,'' RBI governor D Subbarao said in the policy announcement.

The working group, which would review the present BPLR system and suggest changes needed to make credit pricing more transparent, is expected to present its report by the end of August.

''While many banks have reduced interest rates to some extent since October 2008, most of them extend loans to bigger customers at rates that are much below their existing BPLR and that has prompted RBI to review the system,'' said Arun Kaul, treasurer, Punjab National Bank.