Business Daily from THE HINDU group of publications
Saturday, Aug 05, 2006
Money & Banking - Public Sector Banks
Government - Financial Policy
Chidambaram defends advisory to banks on PLR
Note of caution
The Finance Ministry's letter is seen as a reflection of the Government's concern over rising interest rates in a growing economy.
MR P. CHIDAMBARAM
New Delhi , Aug. 4
The Finance Minister, Mr P Chidambaram, on Friday justified the move to `advise' public sector banks to consult their boards before revising lending rates, stating that the Government as a majority shareholder had a right to express its views on such decisions.
Speaking to reporters here, the Finance Minister said "All that we have done is advise banks to place before the board any decision on rates. The Government is a majority shareholder and there is a Government nominee on the boards of banks. What is wrong with the advice?"
Mr Chidambaram was responding to queries outside Parliament when asked about the Finance Ministry's letter to public sector banks suggesting that bank boards be consulted before hiking their prime lending rates (PLR).
Several aspects in focus
Mr Chidambaram felt that a number of aspects had to be looked into after the RBI raised its reverse repo rate on July 25. He pointed out that the Government, as a majority shareholder in public sector banks, had a view on the issue of rates and had a right to be heard at the board on such matters. The Government nominees would convey the official viewpoint.
The Finance Ministry's letter is also seen as a reflection of the Government's concern over rising interest rates in a growing economy.
In its letter, the Finance Ministry had asked chiefs of public sector banks to keep the PLR hike in abeyance until their boards consider the matter.
Public sector banks such as State Bank of India and Punjab National Bank (PNB) had earlier this week raised their PLR on the back of the July 25 decision of the Reserve Bank of India to hike short-term interest rates by 25 basis points.
Both SBI and PNB raised PLR by 25 basis points, respectively. While the SBI PLR went up to 11 per cent from August 2, PNB raised its PLR to 11.50 per cent.
The decision to hike PLR traditionally comes from the Asset-Liability Committee (ALCO) of these banks. The ALCO, comprising senior officials, is constituted by the boards and usually enjoys the board's mandate on such recommendations, banking industry sources said.
Meanwhile, the SBI Chairman, Mr O.P. Bhatt, who was here for a function in the Railway Ministry, told reporters that the bank's PLR hike decision of August 1 would be referred to the board next week. PNB maintained that the rate hike had been effected only after getting the permission of the board.
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