SBI may revise base rate further; to unleash a rate war

State Bank of India (SBI), India's largest bank by assets, may reduce its base rate once again to take the competition head on.

Arundhati Bhattacharya, chairman, SBI, told dna in an interview, "We will take a call on the base rate soon, probably by April-end. We are likely to revise our base rate after we see how the fourth quarter numbers look. We will definitely bring down rates if there is a possibility. We will also revise our deposit rates."

On Sunday SBI announced revised rates on its home loans, making them the cheapest in the market. This rate reduction follows the cut in its base rate on April 7. Base rate is the floor price for all loans of a bank below which it cannot lend. For women home loan borrowers, the interest rates will be 9.85% and for others it will be at 9.90%, matching the rate offered by HDFC, the largest non-bank home financier in the country.

With the bank planning to grow its credit by 14% in the new financial year, it needs to keep rates competitive specially at a time when customers, both corporate and retail, are acutely sensitive about interest rates. With no prepayment penalty it has now become easy for customers to shift their loans with lower rates. In fact, SBI has built a good chunk of its portfolio by taking over corporate and retail loans from other banks (refinance).

The largest lender in the country, which has always kept its base rate among the lowest, had been sidestepped by the private sector in the recent rate revisions. On April 7, when the bank reduced its base rate by 0.15% to 9.85%, responding to a 0.50% cut in repo rate by the Reserve Bank of India (RBI) in January and March,

ICICI Bank slashed base rate by 25 basis points to 9.75%. HDFC reduced its base rate by 20 basis points to 9.90% and made it the cheapest home loan provider in the market at 9.90%. (One basis point is equivalent to one-hundredth of a percentage.)

SBI's strategy has always been to offer the lowest rates in the market, which is then followed by competition.

Before initiating base rate cut which would make all loans cheaper for its customers, the bank plans to reduce its deposit rates in the one-year tenure and increase its interest rates on the shorter-term maturities.

"But the fact of the matter is that we are not seeing too much of reduction in the cost of deposits. And had we seen robust credit growth it would not have mattered. Because then we would have made up in the topline what we lost in the margins. But even that has not taken place. We have been cautious. But that does not mean we won't reduce in the future. If we see that this is made up from other sources we will reduce our base rate," Bhattacharya said.

SBI does not fear that lowering deposits rates will see exodus of deposits to government savings schemes like the Public Provident Fund (PPF) and the Kisan Vikas Patra offering 8.7%, and Sukanya Samriddhi account scheme 9.2%.

About 50% of the household savings in India are held in bank deposits. "This pattern is not going to change significantly. Because it is also about reach and access. We will also have deposit mobilisation drives across the 16,206 branch network, we will be able to assure a stable deposit base. We have also shed most of our high-cost deposits," Bhattacharya said.

ICICI Bank said its existing floating rate customers will get the benefit of the new rate from April 10, while new borrowers will get it from July 1. HDFC Bank and ICICI Bank have also reduced deposit rates by 25 basis points for medium-term deposits of up to Rs 1 crore.