Banks had raised the interest rates on loans by as much as 350 basis points although the cost of deposits had increased by a maximum of 200 basis points. With the deposit rates having softened from the April 2007 levels, banks have decided to pass on the benefits but only to the new borrowers.

While the country's two largest banks, State Bank of India [Get Quote] (SBI) and ICICI Bank [Get Quote], have refrained from lowering their benchmark prime lending rates (PLRs) in 2007-08, they have been giving home loans, car loans and other retail loans to new borrowers at lower interest rates for almost a third of the year.

Even as there has been no easing of interest burden for existing borrowers, who have seen interest rates climb up by up to 350 basis points since May 2006, banks have been offering new home loans at 50-100 basis points reduced rates since October 2007 as part of festival period offers.

SBI initially offered the discounted rates from October 8 till December 31, only to extend the limited period offer till February 16.

The interest rates of 8.25-9 per cent being offered by the top five public sector banks on 1-3 year deposits are in line with the deposit rates prevalent in September 2001.

The deposit rates then were 8-9.5 per cent. However, the PLRs of these banks are much higher at 12.75-13.25 per cent compared with 11-12 per cent in September 2001.

The country's largest lender had reduced the interest rates on new home, car, truck and farm equipment loans by 50-200 basis points in October 2007 to boost the consumer demand.

SBI is offering fresh housing loans at interest rates of 10-10.75 per cent. This is 50-100 basis points lower than the rates that existing borrowers are required to pay.

ICICI Bank has cut the interest rates on fresh floating rate home loans by 50 basis points to 11 per cent and retail loans by 25-50 basis points. "We have decided to extend the festival offer as we are aggressively looking to build our (retail) portfolio.

 Additionally, there has been a bit of a slowdown now with the feeling that the high interest rates have begun to bite," said a senior SBI official.

Since May 2006, SBI raised the home loan rates by 250 basis points for existing borrowers, while ICICI Bank hiked the rates by 350 basis points.

The cost of SBI's deposits increased by 100 basis points during the period, while that of ICICI Bank rose by 200 basis points.

"The NIMs at 3 per cent is just adequate in India and in line with what the market expects. The productivity in Indian banking, though improving, is low compared with world standards.

The operating costs are high, as they account for rural branches and targeted loans," according to Bank of Baroda [Get Quote], managing director, Anil Khandelwal.

The Reserve Bank of India governor, Y V Reddy said, "Banks' net interest margins are high, definitely by global standards.

There was greater need for banks to look at their institutional and procedural constraints to see that the credit delivery is improved."

The finance minister, P Chidambaram, had earlier asked the public sector banks to move towards net interest margins of 2 per cent.

Despite rising cost of funds, the NIMs of banks have remained unaffected due to the higher interest rates on old loans. SBI's NIM stood at 2.83 per cent at the end of December 2007, unchanged from 2.84 per cent in the preceding quarter. ICICI Bank's NIM has, in fact, marginally improved to 2.3 per cent from 2.23 per cent over the same period.

"The fact is that revising PLR or card rates involve some sort of menu costs. Offering lower interest rates to new borrowers, while keeping the PLR unchanged, is a business decision.

There is competition in the market. The price differentials are not crazy. This is not a regulatory issue. The kind of competition precludes any unfair lending practice," said a senior official of a large private sector bank.

This is the first of a two-part series on banks' PLRs remaining sticky as rates soften.