Base rate will push up short term lending rates

The base rate system, which is to be in place from July 1, is likely to lead to an increase in short-term lending rates. This is because banks will be forbidden from lending below the base rate, which is decided based on their cost of funds and is likely to be around 8%.

So long, banks have been lending short-term, usually to corporates, at below the benchmark prime lending rate, sometimes at below 8%.

M Narendra, executive director, Bank of India, said short term lending are bound to see a correction once the base rate regime sets in. However, base rate will not have an impact on longer-term loans, he noted. “Currently some of the major infrastructure projects are financed at 10% to 11%. That will not see a major change,” he said on the sidelines of the 23rd Skoch Summit in Mumbai on Thursday.

MV Tanksale, executive director, Punjab National Bank, said that whatever subsidisation was happening in the industry will get corrected.

Both Bank of India and Punjab National Bank are looking at a base rate of between 8% to 8.5%.

“We will crystallise the figures and our base rate will probably be decided on 28th or 29th of this month, after our board meeting,” said Tanksale.

When asked about possibility of cartelization by banks in setting their base rates, K C Chakrabarty, deputy governor, Reserve Bank of India, said the central bank cannot forbid banks to discuss on base rates. “It may happen or not, we do not know, but it will not surprise us,” he said.

According to the final guidelines on base rate, RBI has asked banks to refer to their base rates from July 1, 2010.

With less than a month left for implementation of base rates, banks are in the final stages of their calculations. Banks are holding informal meetings to discuss the implementation issues.

“Earlier private sector banks prime lending rate was higher than public sector banks, but now the tide is turning. We don’t bother about that… competition will take care of that. The purpose was to bring transparency in pricing and we have advocated that bringing in the base rate will bring down the cost of borrowing,” said Chakrabarty.