After experimenting with different permutations and combinations, banks have realised that it is the customer who will decide the lending rate.
Base rate, the new loan pricing regime, the formula of which was required to be finalised by the end of December, will reflect the customers’ deposit rate preferences. Banks, while freezing the base rate formula, are taking the most preferred deposit bucket of customers to indicate the benchmark cost.
Union Bank of India, for example, has decided to take the cost it pays for 180-279-day deposits as the benchmark to decide the base rate, because depositors have shown preference for that maturity. Initially, it had taken the average cost of funds of the previous quarter. Similarly, Bank of Baroda will take the 180-day card rate on deposits instead of the 90-day card rate.
“The cost of deposits has increased significantly over the last few months. This needs to be reflected in the base rate. The cost variable should be flexible so as to reflect any change in costs more efficiently and immediately,” said a government bank executive in the risk management department.
“Nearly half our customers prefer deposits between six months and one year. The base rate will reflect that,” said a treasury official at a Mumbai-based public sector bank.
While most public sector banks have finalised their base rate formula, the country’s largest lender, State Bank of India (SBI), will take a call on Thursday when the bank’s board meets to review the base rate.
SBI, which has a base rate of 7.6 per cent, the lowest among state-owned banks, had taken the six-month average cost of deposit to arrive at the rate. According to a senior SBI official, the bank may now take the average cost of two deposit buckets, 90 days and 180 days.
Executives at public sector banks have also realised that it is the cost of deposits which more precisely reflects the cost changes rather than the cost of funds. “The reliance on deposits is much higher than borrowings. As a result, the probability of an error will be lesser in cost of deposits than cost of funds,” said an executive director of a public sector bank. Some banks indicate that the cost of funds is lower than the cost of deposits. So, if a bank takes the cost of deposits, its base rate will be higher than what it would have been had the cost of funds been taken.
Extension of deadline
Under the new loan pricing mechanism, which came into effect from July 1, banks were allowed to tweak the base rate calculation methodology for six months, that is, till December 31. After that, banks have to freeze the formula.
However, banks now feel the deadline to freeze the base rate model should be extended by another three to six months.
“Right now, there is a lot of volatility in rates. So, we need to have some more time before freezing the base rate,” said an official at an associate bank of SBI.
A few banks have also written to the Indian Banks’ Association to take up the issue with the Reserve Bank of India. A senior Canara Bank official said the bank had till date used the card rate for 180-day deposits to calculate its base rate. “The last two months have seen volatility due to a sharp increase in deposit rates. This has impacted the calculations, making it tough to firm up the methodology. Hence, it will make sense to give additional three months to decide the formula.”
