Bankers to meet today for base rate consensus

MUMBAI: CEOs of large commercial banks will meet on Friday to arrive at some consensus on the base rate — the new system of charging interest rate on loans. Base rate is the rate, below which no bank can lend to its customers and is aimed at bringing transparency in the system.
RBI has asked banks to replace prime lending rate with base rate from July 1. At the same time, the banking regulator has given banks discretion to decide on parameters to arrive at the bank rate. While some banks may choose to peg base rate on one-year deposits, another bank may choose to peg on overnight call money rates. As a result, bank rate may vary widely from one bank to another.
So far, even as most banks have pegged their PLR in the range of 11-12.75%, bulk of the loan is disbursed at rates below the PLR — popularly known as sub-PLR. Nearly 70% of the loan is at sub-PLR rates. Now that no bank can lend below base rate, some government-owned banks are worried that private banks and foreign banks may peg their base rate very low to capture business. This is because several top-rated corporates, especially oil companies, have been borrowing for one month to three month at rates ranging from 6.5% to 7.5%.
According to a CEO of large bank, “PSU banks do not want to lose lending opportunities. They are worried that if they keep the base rate higher, they may lose business to private banks while if they keep the rate too low, they may have to take a hit on their margins. It’s a Catch-22 situation. But if major banks take a uniform decision on base rate, they could match competition to some extent.”
The meeting of bank chiefs has been initiated by State Bank of India as it will be held at SBI headquarters in Mumbai. In a media briefing, sometime in February, SBI chairman OP Bhatt had indicated that the base rate would be around 8%.
The draft report on base rate, headed by Deepak Mohanti, executive director of RBI, had suggested that banks could arrive at base rate, taking into account one-year deposit to calculate base rate. However, in the final report, RBI said each bank is free to choose any deposit to arrive at the base rate or they can have their own formula to arrive at it.