SBI Cuts Prime Lending Rate
State Bank of India (SBI) India’s largest bank has decided to reduce its prime lending rate by 75 basis points. The cut in interest rate is effective today, and was hammered out last week when the Chairmen of India’s 28 largest state owned lenders met with the Finance Minister P Chidamabaram. State owned commercial banks, account for around 96 per cent of the domestic credit market, and have agreed to cut benchmark prime lending rates in an effort to spur economic growth.
SBI said it may also reduce the interest it pays on deposits by 50 basis points and cut its mortgage lending rate as well. Chairman OP Bhatt said in a news conference last week. “We are also examining a cut in home loan rates by half a per cent. This is bound to happen because 80 to 90 per cent of the housing loans in India are taken by the low- and mid-income sectors. Even a 25 per cent fluctuation in home loan EMIs makes a huge difference for them. There could be corrections in the real estate prices as well, which could spur demand for home loans in the coming months,”
The decision by state owned lenders comes against a backdrop of corporate complaints of high borrowing costs and a non-availability of fresh credit despite several steps the central bank took to increase liquidity through cutting the cash reserve ratio (CRR).
Indian borrowers or firms are struggling to raise capital for investments, since the Government overwhelmingly dominates bank lending through the Statutory Lending Ratio (SLR) which compels banks to allocate up to 24 percent of their deposits to Government debt. The Government requires banks to lend to priority sectors through directed lending regulations, regardless of credit quality.
Indian borrowers up till now have been raising capital through rights issues, ECB’s or FCCB’s, domestic equity markets have sold off by nearly 50% since January, rendering rights issues nearly impossible to execute even for the most blue chip of issuers, as Tata Motors found to its dismay. The credit crisis now prohibits altogether external commercial borrowings (ECB’s) and foreign currency convertible bonds (FCCB). The absence of a domestic bond due to the SLR, and directed lending is not acceptable for an emerging market like India which wants to grow at double digit clips.
If India wants to be a strong and vibrant economy then it needs a deep and liquid corporate bond market. It is an outrage that politicians do not recognise the urgency of this and move faster to remedy the situation. For the last 5 years, political realities of a coalition with the communist party aside, the Congress government should have moved earlier to remove the yoke of a grumpy partner that second guessed every move it made. Instead it chose to wait until the last possible minute and engage in brinkmanship only when it was clear its term was nearly over.
What is the point of democracy, if politicians serve themselves before serving the country? How long do they expect educated Indians to stand by whilst successive governments do for all intents and purposes nothing, asking us to understand the political reality on the ground?
If India grows, it does so in spite of it itself, for she is her own worst enemy.
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