Union Bank springs a surprise, cuts rate by 10 basis points

MUMBAI:State-run Union Bank of India chairman MV Nair has done what the Reserve Bank of India governor Duvvuri Subbarao is hesitant to do - cut interest rates - though the quantum of cut appears to be a token than a strong signal where competitors will be forced to follow.

The Mumbai-headquartered bank on Thursday surprised the market by cutting its base rate, the minimum lending rate, by 10 basis points, becoming the first banker this year to do so when others are waiting for a signal from the central bank.

"Our asset liability committee, in its quarterly review of interest rates, has decided to bring down the base rate by 10 basis points from 10.75% to 10.65% with immediate effect," said the bank in a statement. The bank's prime-lending rate is 15.50%.

While the RBI governor has signalled that he would not raise rates any more, after raising it 13 times since 2010 to fight inflation, he is in no mood to cut the rates till the rate of price climb falls to his comfort level of 7%, from an average of 9.5% for nearly two years.

The development signals a reversal of the high interest rate regime after a span of two and a half years.

Base rate, which is the minimum rate that a bank charges its best customers, is a function of cost of deposits and profit margin. If the cost comes down, the bank will have to pass on the benefits to its borrowers, according to the formula prescribed by the banking regulator.

The interest rate cycle has reversed after a span of two and half years. Union Bank had last lowered its rate in July 2009 to 11.75% from 12.25%. However, since July 2009, it has been raising its lending rates consistently.

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