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SBI cuts short-term lending rates by 50 basis points

The State Bank of India, India's largest state-run bank, on Saturday said it is cutting its short-term lending rates and long term deposit rates.

Bankers said they were not surprised and the bank had made the right move to tackle falling asset yields and a glut of deposits.

SBI said it is cutting the rate on prime loans for maturities less than one year by 50 basis points from August 6. It is also reducing the rate on deposits with terms of one year and above by 50 basis points.

SBI maintained its prime lending rate, which it charges top-rated customers, at 11.50 per cent.

"It was inevitable. They've been having too much of inflow of deposits," said Neeraj Gambhir, assistant general manager at ICICI treasury.

"It is a signal to the market...that yields on corporate and government securities have fallen so much that it has become difficult for banks to sustain these high deposit rates."

Analysts say bank credit has fallen with little fresh investment taking place in the slowing economy and sluggish industrial sector.

Simultaneously, a stock market scandal, a more recent and ongoing crisis at the country's largest mutual fund manager - the Unit Trust of India - and heavy spending by the government have led to surpluses with the public, most of which is being parked in demand and time deposits with state-run banks.

"It's a signal of comfortable short-term liquidity combined with the fact that they are seeing a flatter yield curve," said Janak Desai, treasurer at private-sector IDBI Bank.

There has also been a flood of foreign capital inflows, which began with the State Bank of India's expatriate deposit offering that raised $5.5 billion.

This was followed through the first half of 2001 by heavy foreign fund inflows -- these totalled more than $2.5 billion compared with $1.56 billion through the whole of 2000.

Falling yields

Since November yields have been on a downtrend, barring brief spells of volatility, thanks mainly to easy availability of funds with banks following huge foreign capital inflows and poor demand for credit in a sluggish economy.

The central bank has cut its benchmark bank rate twice this year by a total of 100 basis points to help revive economic growth. The rate is currently at seven per cent, its lowest level since 1973 and analysts do no see further cuts in the immediate future.

The benchmark 10-year bond yield fell to a record low of 9.2 per cent last month, compared with 11.6 in November.

On Saturday, it traded in early deals at 9.33 per cent, but fell after the SBI announced the rate cuts to 9.30 per cent.

With the central bank having permitted banks to lend below their prime rates, even longer-term corporate loans are cheaper, a reason why SBI's lending rate cut did not matter much.

"The cut in the short-term lending rates is not significant since banks are anyway allowed sub-PLR (prime lending rate) lending," ICICI's Gambhir said.

Yields on top-rated three-month commercial paper have slid to eight per cent now from a peak just over 12 per cent about a year back.

IDBI Bank's Desai said he expected to see a further changes in deposit rates.

"The deposit rates of nationalised banks were clearly not in line with the way asset yields are falling, and the only way to protect margins was to drop borrowing rates," he said.

"You will see further re-alignment in deposit rates."

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