Mumbai: State Bank of India, India’s largest lender, on Tuesday set its base rate for loans at 7.5%, as part of a new rule that requires banks to set their minimum lending rates.
The base rate would be effective from 1 July.
The Reserve Bank of India (RBI) introduced the new lending rate system or the base rate to ensure that larger borrowers do not bargain for cheaper rates from banks, distorting their asset liability management.
Banks in India tend to charge their biggest corporate borrowers less than published prime rates, which they would no longer be able to do on new loans from 1 July.
After the implementation of the new loan pricing system, existing borrowers would continue to pay at existing rates, while the base rate would apply to new customers.
Improving business and consumer confidence is bringing back credit demand from companies and mortgage borrowers in Asia’s third-largest economy, boosting the earnings of lenders such as HDFC Bank and its bigger rival ICICI Bank.
Bank credit in India grew an annual 19.1% in early June, according to the central bank’s data, in tune with a rise in business and consumer confidence, from a low of 9.7% in October and 16.7% at end-March.
The central bank sees non-food credit growth of commercial banks at 20% in 2010-11, still a far cry from growth rates of above 30% in the pre-crisis period.
Analysts expect loan demand to pick up further in the second half of 2010-11 that started on 1 April as industries will need more funds to expand operations in an economy forecast to grow more than 8% in this fiscal year.
Shares in State Bank of India, which the market values at about $32 billion, were up 0.1% at Rs2,303 in the main Mumbai market that was down 0.7%. Shares in ICICI was down 1.3% and HDFC Bank was down 1.4%.