With the base rate coming into implementation in the next two months, all banks are in move to calculate their base rate which would be replacing the benchmark prime lending rate (BPLR) completely from the loan pricing mechanism of Indian banks. The base rate is coming into play from 1st July 2010.
Most of these banks are however on the track of competitive pricing and thereby would decide their rates on the basis of the rates declared by the country's largest lender, SBI. They do not want to lose in the market to SBI.
"SBI has a market share of 40-45% in the corporate lending market. They can possibly have the lowest base rate and can sweep away competition on pricing," said Abizer Diwanji, head (financial services), KPMG.
Experts say that the other public sector banks would be following the rate set by the banking major and private sector entities would be working on their cost efficiencies in order to compete in the market.
The RBI has in its final guidelines mentioned that the banks can set their own parameters for calculating base rate but once a parameter has been selected it cannot be altered or changed.
"We are more comfortable with the 1-year fixed deposit cost as the yardstick to calculate the base rate," said B A Prabhakar, executive director, Bank of India. The bank has declared that its base rate would be above 8%.
"That will be sensible as usually most of the deposits fall in that tenure," said a senior official of Central Bank of India. "Otherwise it may lead to an asset-liability mismatch," he added.
"Charging different base rates for different tenures is ruled out since the RBI has reasoned that banks lend out of a common pool of money," said a senior official from Indian Banks' Association.