Banks welcome base rate; say not to impact margins
Bankers today ruled out any impact on their earnings margins on account of the base rate system proposed by the Reserve Bank of India (RBI) and said the new interest model will enable borrowers bargain effectively to grab a better deal.
"This (the base rate model) would help more scientific bargaining rather than bargaining without any base. This will also ensure that banks can charge their customers according to their risk appetite," Punjab National Bank Chairman and Managing Director K R Kamath, told reporters here today.
To make bank lending more transparent, the Reserve Bank yesterday proposed a new base rate model instead of the present prime lending rate (PLR) system, from next fiscal. The new system prevents banks to lend below their base rate even to top-rated clients.
At present, banks offer loans to corporate clients much below their PLR inviting the apex bank's attention to the matter.
Kamath ruled out any impact on credit growth or net interest margins because of the proposed model, saying the new system will offer a level-playing field to everyone and corporates can still bargain for better pricing from banks.
"Even now (in the PLR system), all top-rated corporates look for cheaper funds. In the new system, its quite obvious that they will look for alternatives," Kamath said.
Announcing the new lending rate guidelines yesterday, RBI said the proposed base rate will be applicable to all new loans from April 1 as well as for existing loans which come up for renewal. Also, it envisages existing borrowers to switch to the new system.
"This is not happening in one day...It will be done in a totally phased manner," Kamath said. PNB has 35 per cent of its total loans under sub-PLR, he added.
Union Bank of India Chairman and Managing Director and Indian Banks Association Chairman M V Nair, said all banks have welcomed the new system. Bankers, who met RBI today to discuss the post-policy scenario, made some suggestions to the central bank on the new model, he said.
"It is a good move...This should be welcomed. Banks are by and large happy with the base rate structure. Some suggestions were given to the RBI on the issue (on the new model)," Nair said, adding the base rate in the industry is likely to be between 8.5-9 per cent.
He did not detail the suggestions but it is understood that banks have sought RBI clarification on categories like exports in the backdrop of the base rate model.
The state-owned Punjab and Sind Bank chief GS Vedi said the new system will bring in more transparency and efficiency in the system.
As per the new guidelines, banks would decide their own base rates on the basis of cost of deposits, adjustments in respect of RBI's mandatory cash requirements, profit margins, among others.
The final rate a borrower will have to pay would be the base rate plus the borrower-specific charges like premium related to maturity of loans.