The Hindu : Business : Board nod `must' for PSBs raising interest rates

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Saturday, Aug 05, 2006

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Business

Board nod `must' for PSBs raising interest rates

Special Correspondent

Directive follows a spate of interest rate hikes by banks

NEW DELHI: Irked at the public sector banks' (PSBs) decision to raise interest rates following the quarterly review of the monetary policy by the Reserve Bank of India (RBI) last month in which short-term rates were hiked by 25 basis points, the Central Government has told the PSBs to seek prior approval of their boards before effecting any increase in rates.

Confirming his Ministry's move while speaking to newspersons here on Friday, the Finance Minister, P. Chidambaram, said: "Yes, we have advised the banks that [any] decision on rate increase has to be taken by the respective boards." Mr Chidambaram argued that with the Government being the majority stakeholder in the PSBs and having its nominees on their boards, it was right for the Finance Ministry to advise banks on interest rate hikes.

"It is necessary for the banks to consult their boards before revising lending rates as there are a number of aspects that need to be looked into after the central bank raised its benchmark rate last month... All that we have done is advise banks to place before their boards any decision on [lending] rates. [The] Government is a majority shareholder and there is a government nominee on the boards of the public sector banks," he said.

Asked if the Ministry's advice could be interpreted as the Centre's interference in the autonomous functioning of the public sector banks, Mr Chidambaram quipped: "What is wrong in it?" However, he quickly went on to add that it was up to the banks to decide on interest rates and the Government could only present its views on the issue.

The Ministry's intervention came on Thursday in the wake of some of the largest PSBs increasing their prime lending rate (PLR) by about 25-50 basis points. As a fall-out of the RBI measure, the PSBs effected an upward revision in the rates of all loans, including the fastest-growing home loan segment.

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