SBI to announce base rate today, may set it at 8%

State Bank of India, the country’s largest lender, has signalled it may fix the base rate for lending at 8% or less, which may prompt some
private banks to offer lower rates to ensure corporate borrowers remain loyal.

“The bank plans to announce its base rate by Tuesday. It would be 8% or less, not more,” said OP Bhatt, chairman of the bank which controls a fifth of the market. He was speaking to reporters after a meeting of bank chairmen with finance minister Pranab Mukherjee.

The SBI management is debating whether to peg the base rate at 7.5% or at a slightly higher 7.75% to retain the edge over some private banks. SBI can well afford to do this since it has access to a big chunk of relatively low-cost deposits, thanks to its pan-India footprint.

In a bid to end the practice of retailers and small enterprises subsiding large companies, the Reserve Bank of India has mandated that all banks arrive at a base rate for lending below which no loans can be extended. Once this rule comes into force on July 1, large corporates, who benefited from so-called sub-prime lending rate (PLR) lending, will have to pay at least the base rate.

Most state-run banks may fix their base rate at between 8% and 9% since their cost of funds does not vary significantly, unlike the private banks. For India’s top private lenders, the challenge will now be to fix the base rate close to SBI or even lower if they have to woo blue chip corporates who are used to shopping around for bargain rates.

Bank of Baroda chairman & managing director MD Mallya said his bank’s base rate would be in the range of 8-8.5%, while Bank of India CMD Alok
Misra said the bank’s asset-liability committee will meet soon to fix the rate. Punjab National Bank chairman & managing director KR Kamath said its rate may be below 8.5%. India’s largest private sector lender ICICI Bank said it plans to announce its base rate on Wednesday. “We will announce our base rate on June 30,” ICICI Bank managing director & chief executive Chanda Kochhar told reporters on Monday.

SBI’s rate would be key as all banks would factor that in while setting their own rates. “We have worked out 3-4 options. But the final decision will depend on the rate fixed by SBI,” said a bank chairman on condition of anonymity.

Banks used to set a PLR, but in most cases funds were given to top corporates below that, leading to others indirectly subsiding the loans. To lure customers, banks also indulged in special offers that were unrelated to the benchmark rates. When the interest rates were cut by the central bank to stimulate demand, many did not pass on the benefits to existing customers, but used that to lure new ones, blunting the RBI’s objectives.

As per the new norms, existing customers will have to migrate to the base rate when their loan contract comes up for renewal. The new rule does not apply to finance companies, including mortgage firms such as Housing Development Finance Corp. They may continue with the PLR mechanism while charging interest rates. But HDFC has decided to do away with the so-called teaser rates, where cost is low in the early years of the loan but climbs progressively.


Source : Economic Times

Posted by: Rishma Shetty