Introduction of base rate will result in sharp reduction.
Bankers are still busy with their calculators trying to work out the proposed base rate that the Reserve Bank of India (RBI) plans to introduce from April but they estimate the benchmark rate will decline to around 9 per cent from 11-15.75 per cent at present.
State Bank of India, the country’s largest lender, has estimated its base rate at around 9 per cent against the prevailing benchmark prime lending rate (BPLR) of 11.75 per cent. Ditto for Union Bank of India.
Similarly, a Bank of India executive said the base rate will be around 300 basis points lower than the prevailing BPLR of 12 per cent.
Corporation Bank sees it a tad higher, while Allahabad Bank and Punjab & Sind Bank expect the rate to be between 9 and 10 per cent.
| BASE GAINS | ||
| Bank | BPLR | Base rate |
| State Bank of India | 11.75 | 9.00 |
| Bank of India | 12.00 | 9.00 |
| Corporation Bank | 12.00 | 9.00-9.25 |
| Union Bank of India | 11.75 | 9.00 |
| Punjab & Sind Bank | 13.50 | 9.00-10.00 |
| Allahabad Bank | 12.00 | 9.00-10.00 |
| Indian Overseas Bank | 12.00 | 10.00-11.00 |
| BPLR: Benchmark prime lending rate; All rates in per cent per annum; Source: Banks | ||
Last evening, RBI issued draft guidelines that proposed to shift from a system of benchmark prime lending rate to a system of base rate from April.
RBI has proposed that banks calculate the base rate on the basis of the cost of funds, overhead costs, adjust for the "negative carry" for funds impounded for the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR) and add a profit margin.
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The main ingredient will be the cost of deposits, with banks that have lower costs, such as SBI, having an edge over the others. “Given that the base rate will be a function of the cost of deposits and operating efficiencies, banks with higher Casa (current and savings account balances) and lower cost-assets (ratio) will benefit as their base rate would be lower than industry average, thereby allowing them to earn higher spreads on their products,” ICICI Securities said in a note.
At the same time bankers warned that the rates they have calculated are based on the present cost of deposits. “It base rate may vary every quarter because of cost of funds, CRR and SLR. It will become very dynamic and can change on quarterly or even on a monthly basis,” said Corporation Bank Chairman and Managing Director JM Garg.
The adjustment for negative carry on CRR and SLR will result in a gain of around one percentage point for banks.
While Union Bank of India Chairman and Managing Director M V Nair, who is also the chairman of the Indian Banks’ Association said that the move will bring about more transparency in pricing, bankers said, it will put an end to the bargaining power of large companies. That is because RBI wants to put an end to sub-base rate lending for all segments other than export finance and directed rate of interest (DRI) scheme for low income groups.
Bankers said only large public sector companies and AAA-rated private players would be able to avail of loans at base rate. Similarly, only short-term loans such as working capital will be available at the base rate.
Short-term rates for large players may go up, but the good news is that bankers expect the lending rates for small and medium enterprises to fall.
“Even that will be a function of demand and supply, if the credit demand is high and liquidity is tight, then the best borrower will also have to pay a premium,” said Corporation Bank’s Garg.