The base rate regime, which became operational yesterday, will spur competition among banks but is unlikely to impact their overall profitability, according to ratings agency Crisil.
The system would enhance competition in the short-term lending space, it said. Issuance volumes in debt capital markets were likely to increase as highly-rated companies begin to shift towards these markets, it said.
Banks with competitive base rates and efficient treasury operations are well placed to benefit from the new scenario. However, competitive pressures were unlikely to impact the overall profitability of the banking system materially, Crisil said.
Suman Chowdhury, head, Crisil Ratings, said, “Banks have the flexibility to control other loan-pricing elements, including tenor and credit risk premiums, and product-specific operating costs. This will provide them some cushion to protect interest spreads.”
The base rate system is also expected to enable banks to respond more efficiently to monetary policy. The mechanism will limit banks’ flexibility to provide finer rates.
Pawan Agrawal, director, CRISIL Ratings, said, “Highly-rated companies availing of short-term loans (estimated at 7 to 10 per cent of total corporate loans) will look to transit to the more attractive debt capital markets (through short-term instruments) and choose banks with lower base rates.”
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The base rate for public sector banks is in the range of 7.5 per cent to 8.25 per cent, while that for private sector and foreign banks is lower — by 50-100 basis points (bps).
Crisil Ratings believes that large private sector banks with more competitive base rates are, therefore, now relatively better placed to garner market share in the short-term corporate lending space.
However, public sector banks with superior treasury operations could partially offset competitive pressures in the short-term lending segment by subscribing to the debt market issuances of corporates, it said.