SBI and all other banks to meet to discuss the new loan pricing system

Base rate is coming into play from 1st July 2010. Although banks have been working on the process of base rate system but all are looking at State Bank of India (SBI). Now the guessing game by banks on each other’s base rate is likely to get over as country’s top bankers are going to meet on the request of SBI to discuss the new loan pricing system.

The meeting will be held a day before i.e. June 15, a fortnight before SBI will make announcement of its base rate, SBI Chairman O P Bhatt said.

However, most of the banks are still have to decide about their base rate and the parameters to be taken into account for calculating the new benchmark. A key parameter is the cost of funds, which can cause a huge variance across banks. For example, if bank base rate is calculated on the basis of overnight cost of funds, which is very low, then the base rate will be significantly lower in comparison to other bank which takes one-year average cost of funds into account.

Thus most of the banks, especially the small banks are waiting for SBI’s base rate announcement. In this meeting all the banks will come to know what their colleagues are contemplating and help put in place an industry-wide consensus.

Last year, the Reserve Bank of India (RBI) had formed a committee headed by Executive Director Deepak Mohanty to review the present system of benchmark prime lending rate as all the banks have different BPLR due to which there is a wide variation in the interest rates offered to the loan borrowers. Therefore the regulator with a aim to bring greater transparency in risk pricing issued final guidelines in April, although the decision about the mechanism was left completely in the hands of banks.

Bhatt said SBI will conduct three more internal meetings to before deciding the final number. Although he gave a hint that bank’s base rate can be around 8%. For its staff members the bank will be announcing its base rate a fortnight before the scheduled roll out so that it gets familiar with the model and the calculation part.

On the other hand Punjab National Bank, country’s second-largest state-run lender, has said that its base rate might be around 8-8.5%.

It is believed the new base rate system will help in eliminating the wide variations prevailing under the BPLR regime. Most of the government owned banks have BPLR around 11-12 per cent, whereas the private banks have BPLR as high as 15.75 per cent.