Banks cut benchmark, hope for better business

Declining credit growth, easier liquidity, and pressure from the government have forced banks to reduce their benchmark lending rates this month. They hope to do better business as a result.

State Bank of India has cut its SBAR by 25 basis points, followed by other banks like Canara Bank, IDBI and Union Bank.

Private sector Axis Bank has also cut rates by 25 basis points.

Credit growth has been a concern with banks this year, with the incremental credit growth falling to 14.4 per cent in 2007-08 from 19.3 per cent in 2006-07.

But, deposits have grown and are at 18.4 per cent this year, compared to 15.1 per cent in 2006-07. The deposits are growing as most banks continue to offer high interest on deposits. Analysts have warned banks that that cutting lending rates while keeping deposit rates high will increase pressure on margins.

SBI’s net interest margin for 9 months ended December 2007 was 2.83 per cent compared with 2.95 per cent in 2006-07.