So it turns out that it?s just a couple of foreign banks and some of the smaller private sector banks that want to be price warriors, even though the range within which banks have fixed their base rates is a fairly wide 200 basis points between Deutsche Bank?s 6.75% and Karnataka Bank?s 8.75%. The smaller banks like IndusInd Bank and Dhanalaxmi Bank, which have priced their loans aggressively with base rate of 7% or even a Kotak Mahindra Bank, which is a close competitor at 7.25%, are probably looking more for retail and smaller corporate customers rather than big blue chip clients. That?s not bad strategy because there is a big market out there and individual borrowers are extremely price sensitive and will flock to these lenders. But they musn?t lose sight of the risk or their spreads in their eagerness to grow their loan book.
As for the bigger private sector banks, they?re playign safe in a rising interest rate environment in which deposits could become more expensive. But it?s clear that they intend to give PSU banks a run for their money. HDFC Bank for instance, has a base rate that?s 75 basis points below that of most PSUs who have decided on 8%, behaving almost as if in a cartel. That?s not too small a difference though how much cheaper a loan from HDFC Bank is compared with a loan from say, a Bank of India, would be interesting to see.
It?s possible that concessions will be passed on through lower spreads; after all, the perception and pricing of risk could differ. As of now, however, it would seem that customers will not see too much of a difference in loan rates between banks and that means service could be a differentiator. For now, therefore, it?s likely to be business as usual with the demand and supply of money determining which way interest rates move, rather than any immediate changes being triggered because of the base rate system.
As some bankers have pointed out, interest rates are likely to move up at the short end with near term money becoming expensive. Also, there will be clearly more action in the Commercial Paper(CP) market with bigger companies opting to borrow there at a lower rate. Although rates are inching up in that market too, that may be more a temporary phenomenon driven by the outflow of money from the system for payments towards telecom licences and advance taxes.
Much has been said about how preferential treatment is given to the larger and more creditworthy clients; it seems unlikely that trend will disappear. And at the end of the day, it should be up to banks to decide who they want to lend to and at what price; if they choose to keep non-performing assets in check over a better yield, the option should be theirs.
Interestingly, banks seem to have picked up varying benchmarks to arrive at the base rate; some like SBI have opted for six-month deposits as a benchmark while others like an Axis Bank have chosen a weighted average cost across both shorter and longer-tenure deposits. Using one rate, like a 6-month deposit rate, however, may not work out as well as a weighted average cost across deposits of several tenures.