Banks seek freedom to fix base rate in first Year

Still confused over parameters to set the rate.

Banks have asked the Reserve Bank of India (RBI) for flexibility in selecting the parameters for calculating the base rate during the first year of the new regime.

Bankers, who met RBI deputy governors on Friday, discussed the issues regarding the parameters for calculating the rate.

According to the formula proposed by the regulator, the base rate will depend on the cost of deposit, adjustment for the negative carry in respect of cash reserve ratio and statutory liquidity ratio, overhead costs and a profit margin.

Banks are still confused over what parameters to use for arriving at the cost of deposit and the profit margin. For example, the cost of deposit may be negligible if a bank uses overnight cost of funds as the parameter. But once a bank decides to take a particular parameter to indicate cost of deposit or profit margin, it will not able to change it.

“We have requested for allowing us to change the parameter at least in the first year of operation (of the new regime),” State Bank of India Chairman OP Bhatt said.

He said SBI was considering the average cost of deposit as the indicator for its cost of deposit. “We have not decided the indicator for profit margin, but we can opt for net profit, though it can be very volatile,” Bhatt said.

Since RBI has left it to banks to decide the parameters, banks are trying to guess about the methodology to be adopted by competitors. If a bank opts for shorter-term deposits as the benchmark for calculating the cost of deposit, its base rate is expected to be lower.

On Friday, the regulator allowed banks to move to the new regime, which will restrict their ability to lend below the benchmark rate, from July, instead of April 1 as proposed earlier.