SBI base rate likely today; RBI dilutes loans norms

Written by Press Trust of India | Mumbai | Updated: Jun 29 2010, 04:45am hrs
State Bank of India is likely to fix its base ratethe new lending benchmark banks will follow from next monthat around 7.75% after factoring in the clarifications made by the Reserve Bank of India (RBI) on treatment of concessional loans.

The banking major, whose base rate would set the trend for other banks in the industry, is likely to make an announcement in this regard on Monday, according to a source.

SBI had sought some clarifications from the RBI on concessional loans when the base rate kicks in. The RBI has now agreed to relax norms for three category of loans, the source said.

The clarifications were sought with regard to certain category of advances, such as crop loans, restructured advances and export-credit while finalising its base rate.

Early this week, RBI sent a letter to Indian Banks Association (IBA) clarifying that the base rate norms will not affect the operations of the governments interest rate subvention schemes for export and agriculture loans.

The RBI assured that if interest earned by the bank, including subvention, falls below the base rate, it will not be treated as violation of norms. Also, the rules will be relaxed for restructured loans, whose interest rates come below the base rate, the RBI said.

Recently, SBI chairman OP Bhatt had said that the banks base rate will be calculated in line with its cost of deposits.

According to RBI guidelines, banks are free to take any parameter to calculate their base rate and are allowed to try different methodologies till December.

The effective rate, which a customer will have to pay on loans will comprise tenure premium, channel specific transaction charges and risk premium of loans above the base rate.

Most of the public-sector banks are likely to track SBIs base rate while arriving at their own rates, which could be between 8-8.5%.

On the other side, while private and foreign sector lenders are expected to go for 6-7.5% to attract corporate borrowers seeking short-term loans.

The RBI will introduce the base rate model from July 1 to replace the existing benchmark prime lending rate (BPLR) model with a view to bring in more transparency in the way banks lend. At present, banks loan at much lower rates to high-rated corporate borrowers, but charge a higher rate from the common man.

However, banks are worried that corporate customers, seeking short-term loans, may approach alternative sources for funding, as no bank will be allowed to lend below its base rate. At present, shorty-term corporate loans are given at much low rates, sometimes as low as 6-7%, which is well-below the base rate.

Banks are also in a quandary about handling both the BPLR and base rate systems simultaneously at least for next few years as it is up to the customer to decide whether to shift his existing loan to the base rate system.