Base Rate

Banks have announced their base rates as the quarter July-Sep 2010 has got underway. RBI had stipulated that all banks should move on to the Base Rate system and announce their new rates before July 1, 2010. Consequently, from July 1, 2010, onwards banks will give up the earlier Benchmark Prime Lending Rate (BPLR) system of lending and all loans will henceforth be priced keeping the Base Rate as the starting point. Under the old system, most of the bank loans were advanced below BPLR. As a result, the Reserve Bank of India felt that bank lending rates were inflexible and were not transmitting interest rate change signals to the market. Under the new system, banks cannot lend below their Base Rate. The Base Rate can serve as the reference benchmark rate for floating rate loan products, apart from the other market benchmark rates. The following categories of loans could be priced without reference to the Base Rate: Differential Rate of Interest (DRI) advances Loans to banks own employees Loans to banks depositors against their own deposits RBI has also clarified that certain interest rate subvention schemes would continue as earlier, such as for crop loans below Rs 3 lakh, and, restructured loans. For exportrelated schemes, even after subvention for certain sectors, the rate cannot go below Base Rate.

Banks have announced their Base Rate. Below is a table of some of the leading banks that have announced their Base Rate. We have also compared the new Base Rates with BPLR rates. Base Rate Public Sector Banks State Bank of India Punjab National Bank Bank of Baroda Union Bank of India Canara Bank Bank of India Private Sector Banks ICICI Bank HDFC Bank Axis Bank Dhanlaxmi Bank Indusind Bank Federal Bank 7.50 8.00 8.00 8.00 8.00 8.00 7.50 7.25 7.50 7.00 7.00 7.75 BPLR 11.75 11.00 12.00 11.75 12.00 12.00 14.75 15.75 14.75 16.00 16.75 14.25

Some important facts: SBI was the first bank to announce its base rate at 7.5%. SBI said that it has calculated the base rate on the basis of cost of its 6-month deposit. Most public sector banks have kept the base rate at 8%. Only PNB has so far disclosed its methodology saying Base Rate is calculated taking the cost of all deposits in previous quarter. Interestingly, private sector banks have either matched SBI or have kept base rates lower than SBI. As banks are still in the process of putting their methodology on their websites (RBI requires them to do so), we will only get the details later. Different banks must have calculated their respective Base Rates differently. How banks have interpreted cost of deposits would be a critical point. Some banks may take historical cost of deposits; some banks may take future cost of deposits etc. It could also be possible that as some banks may not have such a wide deposit base. In that case, they could be borrowing from the market and might have priced their Base Rate accordingly.