MUMBAI, June 25: The public sector banking industry, led by the State Bank of India, is likely to cut the prime lending rate by at least 50 basis points and re-align the deposit rate structure in the next few weeks.

Although PLR is not linked to the bank rate, the Reserve Bank of India's decision to reduce bank rate by 100 basis points will have a bearing on the lending rates. "The reduction in bank rate is nothing but a signal of a lower interest rate regime as RBI wants to use bank rate as reference rate.

Morevoer, since deposit rates up to one year is directly linked to bank rate, it is likely to trigger an across-the-board slicing of PLR as the cost of borrowing will come down," a senior banker said.

Financial institutions are also likely to slash their lending rates. ICICI will have relook at its medium-term prime rate (MTPR) this week. Kalpana Morparia, general manager (treasury and resources), said, "Our MTPR offering is dynamic and is being looked into. MTPR is linked to the movement in liquidity and short-term interest rates are clearly moving southwards.

A cut in the long-term PLR will, however, be reviewed only at a later stage."A section of bankers is sceptical about the growth in non-food credit offtake even if PLRs are revised downwards.

They feel that unless industrial production and demand for goods really take off, there will not be much demand for credit, however cheap a rate it is offered at.

No impact on bank deposits; GDR market upbeat; Bond yields to dip; Post-shipment credit dip to boost exports: The central bank had in its April monetary policy brought down the bank rate from 12 per cent to 11 per cent and linked it to a string of various refinance rates.

The banking industry reacted immediately with a majority of commercial banks slashing their PLRs from 50-100 basis points. While the State Bank of India, the country's largest financial intermediary, led the pack with a 50 basis-point cut to 14 per cent, others like Bank of India, Union Bank of India, Dena Bank and Bank of Baroda followed suit by slashing their lending rates to 14 per cent. The Corporation Bank, however, has the lowest PLR in the industry at 13.50 per cent.

Both SBI chairman MS Verma and Dena Bank chief Ramesh Mishra have recently hinted at a possible cut in PLRs. "Spreads will come under severe pressure during the current fiscal. Even in 1996-97 spreads were quite tight as we reduced the PLR by 200 basis points," Mishra had said.

Though there has been a reduction in deposit rates, bankers admit that spreads will come under severe pressure if any further cut is brought about in their PLRs. SBI chairman MS Verma said, "The only way to lift the pressure on margins will be to introduce flexibility in the lending portfolio." He added that the bank would continue to focus on the reduction in the cost of funds.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.