Cut rates: FM tells banks

Finance minister P. Chidambaram on Wednesday urged PSU banks to reduce base rates to spur consumer demand.

“We have advised the banks to look at the base rate. In my view, reduction of the base rate will be a powerful booster, will be a powerful stimulus to the credit growth,” said Mr Chidambaram after a meeting with PSU bank chiefs.

RBI has cut repo rate by 1.25 percentage points since January 2012, but banks have passed on only 0.30 per cent to consumers. “I have impressed upon the bankers, as the RBI has cut the policy rates by 125 basis points some part of this must indeed be passed on to borrowers,” said the finance minister.

He, however acknowledged, that room to pass on the rate cuts to consumers is restricted because provisioning requirements have increased by about 50 basis points after new norms and the cost of money has risen by 40 or 50 basis points.

“Nevertheless, all of them assured me that during this month they will review their base rates and they will take appropriate decision on cutting the base rate,” said Mr Chidambaram. adding that each bank was free to take its own decision.

Meanwhile, hours after the finance minister’s proding public sector banks to reduce lending rates, Bank of India announced a cut of 0.25 per cent in base rate to 10 per cent. The bank has decided to reduce its base rate from the existing 10.25 per cent to 10 per cent, BoI said.

The new rate would be effective from July 8, it said. However, State Bank of India ruled out the possibility of cutting its minimum lending rate or base rate, saying it was the lowest.