SBI sets base rate at 7.5%, focus now on other banks

Switch Unlikely To Benefit Home Loan Borrowers

    STATE Bank of India (SBI) on Tuesday kicked off the new lending rate regime, known as base rate, at 7.5%, aimed at eliminating banks' opaque lending practices, improve policy transmission and do away with poor subsidising the rich. The bank's base rate is a good 200 basis points above its six-month cost of funds that would protect its profit margins, but would raise short-term borrowing costs for companies. A basis point is 0.01 percentage point. For SBI, about 3% of the corporate loans are below 7.5%. These will migrate to base rate once they come up for renewal.
    "Over a period of time, several concerns have been raised about the way the benchmark prime lending rates system has evolved," the Reserve Bank of India (RBI) had said. It includes, "lack of transparency, downward stickiness and perception of cross-subsidisation in lending."
    Bank of Baroda, Union Bank of India and Punjab National Bank have pegged their base rate at 8%. The new rates are effective July 1.
    No bank can now lend below their base rates, unlike the way they were doing under the prime lending rate, or PLR, regime, which was in effect from 1994 when the nation took early steps toward freeing up lending rates. But it became a mockery when banks began lending far below the PLR to top corporates while retail and small corporates were paying a rate far higher than that. The practice also made the central bank's adjustment of policy rates less effective, since banks were not adjusting their lending rates proportionately. While the latest move is expected to see some shift in short-term borrowing to commercial paper (CP) market, there may not be a significant loss to banks or a majority of the customers.
    "The business for short-term borrowing will move to the CP market and that is one of the intentions," said Mr Bhatt. "Interest rate may go up or down by 25 basis points on consumer loans."
    SBI's home loan customers will continue to pay the same rate under the new system as they paid earlier. If the benchmark lending rate was at 12% and the loan was priced at 200 basis points below that, then the interest rate on the loan was 10%. Under the new system, the customer will be charged base rate plus 250 basis points.
    The impact of interest rate on other consumer loans will be neutral. But some companies, which rely on short-term funds, may have to shell out more as interest. "There may be some rise in the rate offered on the short-end corporate loans to those who currently avail of loans at much lower rates," said Paresh Sukthankar, executive director, HDFC Bank.
    Mr Bhatt said he has proposed to RBI that the bank be allowed to introduce a sunset clause making it compulsory for all customers to shift to the base rate.
BUILDING FROM THE BASE
WHAT'S BASE RATE?
The new benchmark rate below which banks will not provide loans. It is linked to the cost of funds and will replace the benchmark prime lending rate, or BPLR, and bring in transparency in loan pricing. RBI has given banks the flexibility to fix their base rate. It will kick in from July 1.
WHAT'S CUSTOMERS' GAIN?
Small customers will no longer subsidise the larger ones. The range between the best and the highest rates charged by a bank is likely to narrow down. Also, any future changes in interest rates will be effected by varying the base rate. This will ensure that rate hikes or cuts are uniformly passed on to all borrowers.
WHICH SECTORS ARE EXEMPT?
The base rate will not apply to concessional loans for agriculture, exports and other specified sectors.
WHAT'S THE IMPACT OF SBI'S MOVE?
Experts feel most banks are likely to keep their base rates as close as possible to SBI's in a bid to stay competitive. On Tuesday, Bank of Baroda, Union Bank of India and Punjab National Bank pegged their base rate at 8%.