SBI may fix base rate at 8 per cent

Banks to seek further clarity from RBI.

State Bank of India (SBI), the country’s largest lender, today indicated it would fix its base rate, the new loan pricing benchmark, at around 8 per cent, amid signs that other public sector lenders would settle for rates around 8.50 per cent. “We have almost decided what will be our base rate.

Tomorrow is our board meeting, where we will discuss the issue after that we will have a meeting of executives and by June 15, we will announce it. In State Bank, we have almost decided which parameters we are using to indicate the cost of deposits,” SBI Chairman O P Bhatt told reporters after a meeting with other bank chiefs.

The Reserve Bank of India (RBI) has asked banks to follow a new loan pricing mechanism from July, instead of the existing benchmark prime lending rate. The base rate mechanism is expected to be more transparent, though banks are free to decide on the parameters on which they will fix the benchmark. While they are expected to continue with the parameters, they have been given a six-month window to experiment and revise the formula.

Most banks have said they have almost finalised the parameters on which the base rate will be worked, but are awaiting signals from SBI, the market leader, before they announce their new benchmark. “We wanted to informally exchange information on what is the thought process with regard to the base rate,” Bhatt said. Bank of Baroda, Union Bank of India, Bank of India and Central Bank of India were some of the banks that attended the meeting. However, executives from private and foreign banks were not present.

Union Bank of India Chairman and Managing Director M V Nair yesterday said that the bank was looking at a base rate of 8.25-8.5 per cent.

An executive said SBI proposed to approach RBI, seeking further relaxations as banks were barred from lending below the base rate. The only exceptions are loans against deposits, loans to employees and small ticket loans under the Differential Rate of Interest Scheme.

Banks want further regulatory clarity on keeping certain term loans extended below the proposed base rate. In addition, relaxation for bill discounting is being sought.

Bhatt also said SBI was going to use the cost of deposits, not the cost of funds, as the parameter. “We have discussed the issue of cost of deposits. Depending on the tenure of cost of fund, it can alone result in a difference (in base rate) of as much as 50 bps, perhaps more,” he said. For SBI, the cost of deposit is 5.5-6 per cent.

Union Bank had said that it had various benchmarks. “One is the average cost, the other is the average cost for the last quarter, and the third is the marginal cost of funds. Our current thinking is to look at the last quarter’s average cost,” Nair had said.