Four state-owned banks also announce rates; all eyes on private banks now.
State Bank of India (SBI) today fixed its base rate, or the minimum rate at which it will lend to borrowers, at 7.5 per cent. The rate announced by the country’s biggest lender will set a benchmark for other banks and replace the benchmark prime lending rate (BPLR) regime from July 1. SBI, which has a 17 per cent share in all the bank loans offered in the country, presently has a BPLR of 11.75 per cent.
The announcement by SBI was followed by four other public sector banks — Punjab National Bank (PNB), Bank of Baroda, Union Bank of India and Central Bank of India — who set their base rate at 8 per cent. Interestingly, PNB’s BPLR at 11 per cent was lower than that of SBI.
PNB Chairman and Managing Director K R Kamath told Business Standard the bank had fixed the base rate on the basis of cost of deposits at the end of the March quarter, which was 4.88 per cent. The low-cost deposit share was a deciding factor for banks to fix their base rate.
SBI had taken the six month average cost of deposits to arrive at the base rate. The lender said its growing share of low cost deposits had helped it reduce its cost. The bank's current and savings account (casa) growth had been 650 basis points (bps) over the past one year to 45 per cent, according to Chairman Om Prakash Bhatt. The cost of a six-month deposit for SBI is about 5.5 per cent.
Bhatt said by taking the six-month average cost of deposit, the transmission of monetary policy signals will be much more effective. “If we had taken one-year cost, it might not have reflected the current cost, while a three-month cost would not have reflected the historic cost. So, we thought a six-month cost will be the most appropriate.”
The bank’s Deputy Managing Director and Chief Financial Officer, S S Ranjan, said a top-rated company would be able to get loans from SBI at 2-2.5 per cent over the base rate.
PNB also had a healthy casa of 40.85 per cent of total deposits as on March 31, a growth of 200 bps in one year.
The base rate system will replace BPLR following a year-long exercise by the Reserve Bank of India (RBI) to make lending rates more transparent. The parameters banks can take to calculate their base rate include cost of deposits; overhead costs; costs of setting aside cash for maintenance of cash reserve and statutory requirements; and profit margin.
The lending rate will vary, depending upon the risk profile of borrowers and the time period. This will mark a departure from the earlier system, where large companies often extracted loans at rates below the prime lending rate of banks. No bank can now give loans below the base rate, except for a few categories. Only 3 per cent of SBI's corporate loans are extended below 7.5 per cent. The corporate loan book of SBI is around 40 per cent of its total loan book.
Bankers and companies said loans to the corporate sector will not have much adverse impact due to the base rate regime.
"There are not many companies which have borrowed below 7.5 per cent, so the impact of base rate is going to be very limited," said D Muthukumaran, head of group corporate finance at Aditya Birla Management Corporation.
His views were echoed by Chanda Kochhar, managing director and CEO of ICICI Bank. “It is only a way of calculating the rate and improving transparency,” Kochhar said, while adding that the cost of funds for companies will depend on liquidity.
However, some infrastructure companies said the cost for medium-term working capital requirements will go up. The impact won’t be much for long-term money which was always costlier at 9-11 per cent, N K Kakakni, executive director, Simplex Infra, said.
Private sector lender, HDFC Bank, sees most banks fixing the base rate between 6.75 and 8 per cent.
"The base rate for all banks will reflect lending in the market. Lending rates have shown an upward bias in the last few months and the trend may continue for the next couple of months as well," Paresh Sukthankar, executive director of HDFC Bank, told news agencies.
Loans for agriculture, export credit, to banks’ own employees, against deposits and to small-ticket borrowers will remain outside the purview of the base rate.
The bank will add credit premium, tenure premium and allocatable cost to the base rate while deciding the exact lending rate to the borrower. For some borrowers, effective interest rate under the base rate mechanism will be higher, while for others it will be lower. SBI's Bhatt indicated that segments which are more risky may see their effective lending rates going up.
However, the change in actual lending rate to the borrower will be in the range of 25 bps.
Some companies may have to pay as much as 200 bps more on new loans from banks under the base rate, bankers said. To avoid paying higher costs, companies are likely to increase their short-term borrowing via money market instruments and from the capital markets.
No private sector bank has announced its base rate so far. On the possibility of private sector banks setting their base rate lower than that of SBI to attract corporate borrowers, Bhatt said: “We won’t be able to compete with someone who sets a lower base rate but the proportion of the corporate lending of such a bank will be very small as compared to our overall portfolio. There may be some impact, but it will not be large”.
Executive Director of RBI Deepak Mohanty said the central bank would have to collect information from banks on loans under Rs 2 lakh to determine the effectiveness of base rate implementation. Mohanty had chaired the panel which reviewed the BPLR regime. Earlier, banks only filed details of loans above Rs 2 lakh with the RBI.
