Monday, 30th October 2017

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State Bank fixes base rate at 7.5%

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  • Published 30.06.10

Mumbai, June 29: The State Bank of India — the country’s largest commercial bank — today announced a base rate of 7.5 per cent, setting a new benchmark reference rate for the entire suite of loans that it doles out to companies, small businessmen and retail borrowers. The new base rate regime will come into force from July 1.

Back in April, the Reserve Bank of India had directed all banks to fix their base rates under a fiendishly complex formula that enjoins each bank to factor in its cost of funds, unallocable overhead costs and its average return on net worth.

“The base rate is aimed at enhancing transparency in lending rates of banks,” the RBI had said when it set the guidelines for fixing the new reference rate for loans.

Shortly after SBI’s announcement, several state-owned banks — the Bank of Baroda, Union Bank of India, Punjab National Bank (PNB) and Allahabad Bank — announced a base rate of 8 per cent. Private sector banks are expected to announce their base rates on Wednesday.

Banks will not be allowed to lend below the base rate, except in the case of loans to farmers and their own employees. Banks need not link interest rates to the base rate in the case of loans given against fixed deposits.

The base rate will replace the benchmark prime lending rate (BPLR) regime which came into force in 2003.

A working group set up by the RBI to review the BPLR regime observed that it had fallen “short of its original objective of bringing transparency to lending rates”.

Banks have been given time till December 31 to make changes to the methodology of calculating the base rate. They are required to review the new benchmark rate at least once every quarter.

Banks will include customer specific charges or a spread, depending on the risk on this base rate, to arrive at the actual lending rate for a corporate or a retail loan.

Existing corporate loans will also be linked to the base rate when the contracts come up for renewal. The RBI norms stipulate that existing loans based on the BPLR system may run till their maturity. Banks can give their existing borrowers — including retail and personal loan borrowers — the option to price their loans under the new system. Banks, however, cannot charge any fee for such a switchover.

No immediate impact

Bankers are of the view that retail borrowers need not worry at least for now as migration to the new benchmark will not result in any major change in their equated monthly instalments (EMIs). Since housing loans are long-term contracts and do not come up for renewal, banks may give their customers the option to move to the new system.

SBI chairman .P. Bhatt told reporters that the main factor that it had taken into account was the cost of deposits, which has been on the decline. Bhatt added that the bank would announce a decision on its home loan rates — including its popular dual rate scheme — tomorrow.