Banks’ base rate woes are spilling over. As if losing short-term borrowers to the commercial paper (CP) market wasn’t bad enough, they now have to worry about losing customers to other banks too.
For example, Vijaya Bank, which had set its base rate at 8.25%, may be losing customers to say the State Bank of India (SBI), which has a base rate of 7.5%.
By that logic, Karur Vysya Bank and Karnataka Bank, with base rates of 8.5% and 8.75%, respectively, are at maximum disadvantage. Corporation Bank, with a base rate 100 basis points below that of Karnataka Bank, could well be gaining the latter’s customers.
“Those who have set their base rates higher are losing customers to banks that have a lower base rate,” said Suresh Ganapathy, head of financial research team, Macquarie Securities.
“Lending is not happening significantly because of the higher base rate. Corporates are going to banks with lower base rate,” says Albert Tauro, chairman and managing director, Vijaya Bank.
The entire industry has lost a significant number of customers to the CP market.Experts say the banks have themselves to blame for this.
“To set a higher base rate was a conscious decision on their part. At the end of the day, if the smaller banks were serving the larger corporates, they were doing it at a loss,” says Abizer Diwanji, executive director and head of financial services, KPMG.
Analysts said some like SBI have a much better deposit franchise compared with smaller banks and that helped them set lower base rates.
“We have gained customers from banks which had set a higher base rate than ours. But at the same time we have even lost customers to those banks which had set a base rate below ours,” said a senior official of Corporation Bank, requesting not to be named.
Banks, which had set a higher base rate, will not be able to set a lower base rate in a rising interest rate scenario. So, in the time to come, they will lose more customers and thus market share.
“Smaller banks will be losing market share going forward. As interest rates rise, they will become more uncompetitive vis-a-vis the larger peers. If they charge the same rates as larger banks, they will lose out on margins. Similarly, if they charge a higher rate, they will lose out on customers,” says Vaibhav Agrawal, vice-president (research), Angel Broking.
“When our loans will come for renewal, we will take a call on whether the rates are acceptable,” says RR Nair, director and chief executive, LIC Housing Finance.
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