Mumbai: Some Indian private sector banks on Wednesday announced base rates that were a tad lower than those of their public sector counterparts, but banking analysts don’t as yet see a rate war on the horizon.
Going steady: SBI chairman O.P. Bhatt. PTI
HDFC Bank Ltd, the second largest private bank, has pegged its base rate at 7.25%, a quarter percentage point lower than that of the country’s largest lender State Bank of India (SBI). Dhanalakshmi Bank Ltd, a private bank, has pegged it even lower, at 7%.
ICICI Bank Ltd, India’s largest private sector lender, and Axis Bank Ltd, another major private sector bank, have announced base rates on a par with SBI’s 7.5%.
The base rate will replace the benchmark prime lending rate or BPLR of banks from 1 July. From now on, it will be the minimum lending rate below which no bank will be allowed to lend.
Analysts said instead of teasing public sector banks with a low rate, private sector banks are keeping an avenue open for deploying their funds when there is excess money in the system. It doesn’t, however, mean that their final applicable rate will be much different from their public sector peers.
Even now, private sector banks give short-term loans to the highest-rated customers at a lower rate than public sector banks. However, given their balance sheet size, private banks cannot meet all the demands from corporations and eventually corporate borrowers will have to come to the public sector banks, which control about 70% of India’s banking system, for their short-term needs.
“More than 70% of the banking system is telling you that you will not get loans below 7.5-8%. How much will the rest 30% pull through the demand of a cheaper loan,” asked a banking analyst with a local brokerage who did not want to be named.
Corporations will, however, continue to have the option to raise short-term cheap money from the commercial paper market. In fact, SBI chairman O.P. Bhatt said on Tuesday that banks will encourage corporations to raise money through these instruments, by actively buying them.
Commercial paper are short term promissory notes issued by companies for short-term funds.
Banking analysts point out that a corporate borrower first gets a sanction from the bank and it pays interest only after the money is disbursed. But in case of commercial paper, a borrower needs to pay interest from the day the paper is purchased. Besides, when liquidity is tight, the rates of such paper go up.
Another analyst with a local brokerage said the private banks have been offering short-term loans at a cheaper rate than public sector banks to the highest-rated customers. This practice will likely continue even after the base rate kicks in. However, the amount disbursed at lower interest rates will not be too much to hurt their profitability.
“We understand that implementation of the base rate would not materially impact the lending rates and NIM (net interest margin) of the banks,” said Alok Shah, research analyst with India Infoline Ltd, a domestic brokerage. Net interest margin is a key profitability parameter of a bank’s performance.
SBI’s Bhatt said loans below 7.5% constitute only 3% of the bank’s corporate loan book. Meanwhile, SBI extended its cheap home and auto loans till September with terms unchanged. Under the scheme, home loans will be available at 8% for the first year and 9% for the next two years, irrespective of the loan amount.
From the fourth year onwards, the rate will be linked to its base rate. As per the latest base rate of 7.5%, the effective rate will be 9.25% for loans up to Rs50 lakh and 9.75% for loans above that.
For new cars, the interest rate will be 8% for the first year and 10% for next two years. From the fourth year, the rates will be linked to the base rate.
“The rate of interest on other home loan, car loan, educational loan and personal loan products will also be linked to the base rate for all new disbursements,” with effect from July, the bank said in a release.
SBI had on Tuesday pegged its base rate at 7.5%, while Punjab National Bank, Bank of Baroda and a few others pegged their rate at 8%. On Wednesday, Indian Overseas Bank, Syndicate Bank Ltd and Dena Bank said their base rates will be at 8.25%, while IDBI Bank Ltd pegged its base rate at 8%. The only foreign bank to announce its base rate is DBS Bank, at 7%. Among private banks, Karnataka Bank Ltd has pegged its rate at 8.75%, the highest among peers, while Jammu and Kashmir Bank Ltd has fixed it at 8.25%, Federal Bank Ltd at 7.75% and South Indian Bank Ltd at 8.10%.