Techniques to thwart card companies' tricks

In its policy review the Reserve Bank of India has asked the banks to cut down on interest rates. Following the lines banks like SBI, Canara, Allahabad Bank, and from the private sector the HDFC have cut the rates on their retail loans.

As there has been dip in credit growth and easier liquidity it is understood the banks may later or sooner have to cut rates.

In the coming months cut in prime lending rates are likely as private banks would also join the cutting spree.

In the last couple of days two of the top three public sector banks (PSBs) have cut their benchmark prime lending rates (BPLR) in the last couple of days.

Analysts say that only PSBs have cut rates means that comments from the finance minister and the Reserve Bank of India (RBI) governor have played a big role in the move.

"Comments from the RBI and the governor tilted the balance towards rate cuts," said Vaibhav Agarwal, banking research analyst, Angel Broking.

"Also, credit growth for PSBs has dipped and they have enough funds which they collected by garnering bulk deposits at high rates in the fourth quarter of last year," Agarwal said.

The banks have raised rates for deposits due to high demand for loans (30 per cent) and a liquidity squeeze by the RBI, but since then interest rates on bulk deposits have come down by 50-100 basis points, giving banks room to cut rates on the lending side as well.

Hitherto this year, credit growth, at 22 per cent, is an outline of what it was last year.

More cut in rate is expected following finance minister P Chidambaram's comments last month, directing banks to cut interest rates by 50 basis points.

Meanwhile, even though getting a clear direction from the regulators, only PSBs have cut rates or have shown the intention to do so. SBI and Canara Bank have announced a 25 basis point cut, while IDBI and Union Bank have said they will think over at cutting rates next week. As for Private Banks no commitments have come from their side.

Analysts have a view that this is because Private Banks face far less political pressure from the government and also because the PLR is more important to PSUs than private banks. They point out that private banks are much more open to give discounts on PLR.

Chandana Jha, banking analyst with brokerage firm Pioneer, said that private banks are delaying and can afford to delay the rate cut because of increased pricing power and better technology and risk-management systems.

"The fact that frontline private banks like Axis Bank and HDFC Bank have seen year-on-year credit growth at 50-60 per cent compared to the industry average of 14 per cent and PSU average of 9-10 per cent means that they can afford not to be in a hurry to cut rates," Jha said.

In fact analysts are of a view that competition will ensure that interest rates for the banking system as a whole will come off in the next three to six months.

"Credit has contracted dramatically from last year and competition will mean banks will have to cut rates. I expect rates to come down by 25-50 basis points from April," said Prateek Gandotra, banking analyst with Enam.

According to an analysts RBI rate cut in its April monetary policy (inflation permitting) or even before can speed up or increase the magnitude of the rate cut.