Senior officials of two state-run banks, one in Kolkata and another in Chennai, recently told me the State Bank of India (SBI) is wooing away many of their corporate borrowers, offering them lower interest rates. In other words, the nation’s largest lender is waging a rate war.
According to them, SBI chairman Pratip Chaudhuri said at a recent press conference that the bank has about Rs.70,000 crore worth of liquidity and is finding it difficult to deploy the money. Indeed, money has a holding cost (most banks are paying around 8% for one-year deposits and add to that establishment and wage costs) and if it is not profitably deployed, a bank loses out.
In the absence of loan offtake, the only option before a bank is to lend in the call money market where one bank borrows from another to address temporary asset-liability mismatches. Currently, the overnight call money rate is around 7%.
A senior SBI executive, who is responsible for the “rate war” and does not want to be named, says there is no war and his bank can lend at a rate which is cheaper than many others for the simple reason that it has a lower base rate than others. SBI’s base rate is 9.7%, the same as that of HDFC Bank Ltd. India’s largest private sector lender ICICI Bank Ltd’s base rate is 9.75%, but most other banks have pegged their base at 10% or even higher. For instance, the base rate of both Punjab National Bank and Bank of Baroda is 10.25%.
All loan rates are linked to base rate or the minimum lending rate and the spread over base rate depends on the rating of a corporate entity. So, there is bound to be fierce competition among banks for well-rated companies (for borrowers to do bank shopping). Theoretically, if one company, by virtue of its rating, is entitled to get a loan at half a percentage point over a bank’s base rate, SBI can offer it money at 10.2%, while another bank which has 10.25% base rate will charge 10.75%.
A bank can keep a lower base rate if its cost of funds is low. That is possible if it has more low-cost current and savings accounts, or Casa, than high-cost term deposits. Even though banks have the freedom to offer any rate they want for savings accounts, barring a few private banks such as Yes Bank Ltd, Kotak Mahindra Bank Ltd and IndusInd Bank Ltd, most banks are offering 4% and no interest is paid on current accounts.
SBI, HDFC Bank and ICICI Bank have higher Casa than most other banks and hence they can afford to have a relatively lower base rate than others. Axis Bank Ltd and Punjab National Bank, too, have higher Casa but they have a higher base rate. Axis Bank’s base rate is 10%.
In the case of SBI, the advantage that it enjoys over competition by virtue of higher Casa is to some extent nullified by its pile of bad assets. A bank needs to set aside money or provide for bad assets and this hurts its pricing power. Despite holding the biggest pile of bad assets in the industry, if SBI can wage a rate war, it’s good news for consumers. It will be able to sustain the rate war only if it is able to raise the level of its operational efficiency.
Banker’s Trust Realtime is a frequent blog by Tamal Bandyopadhyay, who writes a popular weekly column Banker’s Trust.