Last Friday, the Indian banking industry got a three-month reprieve from shifting to the so-called base rate from the existing benchmark prime lending rate, or BPLR. The base rate will be the floor for all loan rates while BPLR is the cap for the bulk of bank loans at this point. Once it becomes the norm, no bank will be allowed to lend to any borrower at less than the base rate. Two other critical issues are involved in the base rate—banks will have to be transparent in forming the base rate and they should be non-discretionary.
Not all bankers are comfortable with these two conditions. The existing system of BPLR is not entirely transparent and banks often use their discretion while fixing the actual loan rates. Bankers had a long meeting with the Reserve Bank of India (RBI) brass on Friday and bargained hard for discretion in certain areas. For instance, loans against term deposits can be given at below the base rate. Similarly, loans given to banks’ own employees won’t have to be linked to base rate.
Also Read Tamal Bandyopadhyay’s earlier columns
(I don’t understand why banks can’t give their employees a direct subsidy instead of subsidized loans. Bankers, of course, have their own logic. “Don’t airline and railway employees get free air and rail tickets?” one senior banker asked me. I don’t know the answer. Do the employees of telecom firms pay a different tariff? Or, for that matter, do the employees of oil marketing companies pay less to fill the petrol tanks of their cars?)
Banks also want the regulator’s approval to charge less on loans to troubled firms whose debt is being restructured, and RBI may allow them to do so. Currently, BPLR of private banks is much higher than that of public sector banks. The difference is 3-4 percentage points. Once the entire industry shifts to the base rate, won’t the private banks find themselves disadvantaged vis-à-vis their counterparts in the public sector? Not really. “So long, we were keeping a high BPLR and lending at much below it. Now, the process will be reversed. The base rate will be low, but the actual loan rate will be much higher,” says the CEO of a private bank. If it’s that simple, why are the banks making so much fuss? At Friday’s meeting, some bankers wanted RBI to fix the base rate but the regulator declined. I will not be surprised if the industry decides to wait for State Bank of India (SBI) to take the lead and follow the SBI base rate blindly, irrespective of their cost of funds. SBI chairman O.P. Bhatt has hinted at a base rate of around 8.5% and I bet that the base rates of all banks—public and private—will range between 8.25% and 8.75%, if Bhatt sticks to his plan.
While the base rate will have to wait for three months to be implemented, banks will start computing savings bank interest rates daily from April. This, according to an RBI estimate, will push up the cost of savings bank deposits by 34 basis points. One basis point is one-hundredth of a percentage point. The savings bank interest rate is 3.5%, but the average cost for banks is 3.16% as they pay interest on the lowest minimum balance kept in an account between the 10th and the last day of a month. This will change from April. The impact of the overall cost of deposit will depend on the composition of deposits in a bank. While 3.5% interest is paid on savings accounts, no interest is paid on current accounts and higher interest is paid on term deposits. The focus has all along been current and savings accounts, or CASA, to bring down the cost of funds. Punjab National Bank in the public sector and HDFC Bank Ltd and Axis Bank Ltd in the private sector have higher CASA than others. For them, the overall cost of funds may go up by around 15 basis points or so. Banks will feel the heat when RBI frees the savings bank rate. And this can happen sooner than what many of us think. Once the savings bank rate is free, banks may end up paying more in their rush to mop up cheap savings deposits, which will not remain cheap any more. As a regulator, protection of consumer is equally important for RBI as banks’ profit.
Finance minister Pranab Mukherjee’s address to the RBI central board in Mumbai over the weekend turned out to be a non-event. Usually, the customary post-budget board meeting takes place in Delhi but Mukherjee came to the central bank’s headquarters in the platinum jubilee year of RBI. It was also the 100th board meeting of Y.H. Malegam, an eminent chartered accountant and long-time board member.
In his Budget, apart from opening the banking sector to more private players, the finance minister proposed to set up a Financial Sector Legislative Reforms Commission to rewrite and clean up financial sector laws and make them contemporary and an apex level, and a Financial Stability and Development Council to monitor macro prudential supervision of the economy, including the functioning of large financial conglomerates. Apparently, this has not gone down well with RBI and Mukherjee had to assure the board that this will not undermine the independence of regulators. The finance minister also made it clear that RBI should keep a hawk eye on inflation and food price inflation should not be allowed to spill over to other sectors. This means that if there is no improvement in the inflation scenario, RBI will not hesitate to raise its policy rates.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as Mint’s deputy managing editor in Mumbai. Email your comments to firstname.lastname@example.org