State Bank of India, the country’s largest lender, has set base rate at 7.5% per annum. The base rate would be effective from July 1.SBI'srate is key as all banks would factor that in while setting their own rates.As per the new norms, existing customers will have to migrate to the base rate when their loan contract comes up for renewal. The new rule does not apply to finance companies, including mortgage firms such as Housing Development Finance Corp. They may continue with the PLR mechanism while charging interest rates.SBI can well afford to do this since it has access to a big chunk of relatively low-cost deposits, thanks to its pan-India footprint.
In a bid to end the practice of retailers and small enterprises subsiding large companies, the Reserve Bank of India has mandated that all banks arrive at a base rate for lending, below which no loans can be extended. Once this rule comes into force on July 1, large corporates, which benefited from so-called sub-prime lending rate (PLR) lending, will have to pay at least the base rate.Most state-run banks may fix their base rate between 8% and 9% since their cost of funds does not vary significantly, unlike the private banks. For India’s top private lenders, the challenge will now be to fix the base rate close to SBI or even lower if they have to woo blue chip corporates that are used to shopping around for bargain rates.
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