State Bank of India, which accounts for close to a fifth of all bank lending in the country, has reduced its prime lending rates (PLR) by half a percentage point. Following this reduction, the bank’s PLR will come down to 11.75% effective June 29.
The PLR is the reference rate to which banks link their floating rate loans. It reflects the prevailing cost of funds and interest on floating rate loan is expressed as a percentage spread above or below the PLR.
SBI’s rate cut will bring down the borrowing cost on 62% of loans extended by it. The cut will not apply to borrowing under special schemes. These include home loans, education loans, auto loans, produce market loans, and loans against warehouse receipts and loans to small and medium enterprises. Under certain special schemes, loans are available at discounted fixed rate for the initial year.
According to chief financial officer SS Ranjan, the bank has brought down its PLR to 11.75% from its peak level of 13.75% last year to improve credit offtake and stimulate economic growth. “There has been a general demand for lower interest rates and today we have been able to do it because we have been able to bring about certain efficiencies in operations which we would like to pass on to customers,” he said.
“About 68% of our loans are linked to prime lending rate. But various sectors that have already been granted concessions will not be affected because they are already below the PLR-determined rate. As a result, around 62% of our loans will be repriced” said Mr Ranjan.
The rate cut comes within weeks of finance minister, Pranab Mukherjee asking government-owned banks to reduce lending rates. SBI’s prime lending rate is now lower than that of several public sector banks, like Bank of Baroda, Bank of India and Canara Bank, which have retained their prime lending rate at 12%. But SBI’s PLR is higher than that of PNB, which has pegged its benchmark rate at 11%, the lowest in the industry. However, the Delhi-based bank has directed branches not to lend below PLR.
According to Mr Ranjan, Reserve Bank of India’s decision to review the way the PLR functions will not impact SBI’s return on loans. “The only change is that spread may turn positive over PLR”.