RBI dilutes norms for some loans; SBI base rate likely at 7.75%

Country's largest lender State Bank of India (SBI) is likely to fix its base rate--the new lending benchmark banks will follow from next month--at around 7.75 per cent after factoring in the clarifications made by 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 tomorrow, sources in the know told PTI here.

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

Early this week, the RBI sent a letter to Indian Banks Association (IBA) clarifying that the base rate norms will not affect the operations of the government's 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 O P Bhatt had said that the bank's base rate will be calculated in line with its cost of deposits.

According to the Reserve Bank 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 SBI's base rate while arriving at their own rates, which could be between 8-8.5 per cent.

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

The RBI introduced the base rate model from July 1 to replace the existing benchmark prime lending rate (PLR) 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 the 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--some times as low as 6-7 per cent, 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.