MUMBAI, July 29: Bank of India (BoI) is planning to slash both the prime lending rate (PLR) and deposit rates across all maturities. The Mumbai-based public sector bank -- which entered the capital market in the last fiscal with a Rs 675-crore equity issue -- has drawn up plans to privately place about Rs 1500 crore worth of subordinated debt in the second quarter (July-September) of the current fiscal.

"The idea behind raising the tier-II capital through the subordinate debt instrument is to bring down the cost of funds, which will enable the bank to cut both the deposit and lending rates," a source close to the bank said.

Industry sources, however, interpret the BoI move as a reaction to the Industrial Credit & Investment Corporation of India's (ICICI) introduction of short-term prime rate (STPR) for one-year loans. ICICI has pegged STPR at 12.3 per cent- a full percentage point (100 basis points) lower than BoI and a few other public sector banks' PLR, which is currently pegged at 13.5 per cent.

With the private placement of Rs 1,500 worth of long-term debt issue, BoI's capital adequacy ratio, which is currently pegged at 10.26 per cent, will go up substantially.

The mega nationalised bank is planning to float long-term bonds maturing seven and 10 years. Since the long-term bonds beyond five-year maturity will not attract cash reserve ratio (CRR) immediately, the cost of funds will be substantially cheaper for the bank. It is in the process of appointing lead mangers for the subordinated issue.

"The basic objective is to take advantage of the liquidity overhang in the system. The bank will not float plain vanilla instruments. There will be some innovations in the products and the cost of funds will definitely be cheaper than the deposits," sources said. By accessing cheaper resources, the bank plans to cut down its lending rates and deposit rates. Bank of India's PLR, currently, is pegged at 13.5 per cent.

"It can be brought down further once the bank boosts its tier-II capital by raising the subordinated debt. Besides, by expanding its capital base the bank will be able to take bigger exposure in project financing once the infrastructure projects take off in the second half of the current fiscal," sources said.

On the deposit front, Bank of India along with the State Bank of India at present pay the highest interest rates across all maturities. At the lowest level-between 30 days and 45 days -- SBI and BoI offer the maximum among the PSU banks (6 per cent) while others led by Canara Bank offer 5 per cent.

On deposits maturing between one year and two years, SBI and BoI are offering half a percentage points (50 basis points) more than other public sector banks. The gap is widened to 1.5 percentage points (150 basis points) at the next slab -- two-three years -- where BoI and SBI are offering 11.5 per cent. At the highest level- deposits over three years-both the banks are offering 12 per cent.

According to senior analysts, the bank will be able to raise cheap long-term bonds at this juncture when the system is flush with funds. "The coupon for 10-year government paper was fixed at 13.05 per cent in April.

Since then, the liquidity is increased and it will be possible to access long-term funds even at a cheaper cost now," one money maket analysts said.

SBI was the first public sector bank to raise the tier-II capital through subordinated debt issue. Subsequently, Bank of Baroda, Dena Bank and Punjab National Bank raised subordinated debts throught private placements.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.