State-run banks look set to cut rates on RBI cues

State-run banks are likely to cut lending rates following cues from the Reserve Bank and a government looking to pump-prime the flagging economy, bankers and government officials said on Monday. At least four banks, including the largest lender State Bank of India, after a meeting with the finance minister said they would review their lending rates, while a finance ministry official said rates were "still on the higher side." With palpable signs of a slowdown in Asia's third largest economy, the central bank began cutting its key short term lending rate in October. By January, the key short term lending rate was reduced by 350 basis points to an 8-½ year low of 5.5 percent, but banks have not passed all of that to customers. The benchmark prime lending rate of state-run banks declined by just 1.25-2 percentage points in the period, the central bank noted in its quarterly review last month, saying there was "significant room for further reduction". "The transmission of the rate signal, however, has been subdued in the credit market," according to an government report prepared ahead of a meeting of the finance minister with bank chiefs on Monday. Corporates have said the high rates, along with drying of credit sources, have hit growth and crimped profitability. The Indian economy is seen expanding at 7 percent or lower in the year to March, compared with 9 percent or more growth in the last three years. RATES HIGH The finance ministry official, who did not want to be named, said the smaller banks were expected to follow the lead of the top two state-run banks in reducing loan rates. Last week, State Bank of India cut home loan rates to 8 percent from between 9.75 and 12.25 percent, while Punjab National Bank cut its benchmark prime lending rate by 1 percentage point to 11.50 percent. "Credit flows to the housing and the real estate sector needs to be supported and the cost of credit moderated," the official told reporters ahead of the meeting. State Bank's Chairman O.P. Bhat said the bank was considering cutting its rates, and the short-term bias was for interest rates to fall as liquidity was comfortable. Corporation Bank Chairman J.M. Garg said the bank would cut lending rates by 50-100 basis points, while UCO Bank's chairman said there was scope for a 200 basis point cut in rates, in 2-3 steps. Canara Bank Chairman A.C. Mahajan said a decision would be taken within the month on rates. But deposit rates had to come down before banks could make deeper cuts in their lending rates, the bankers said, a view backed by Finance Secretary Arun Ramanathan. "I guess when the deposit rates get moderated, (lending) rates will also soften," Ramanathan told reporters after the meeting. "That is the general expectation."