Connection between base and repo rates is tenuous, says the outgoing Chairman of SBI
“Interest rates will depend on deposit rates and not the repo rate,’’ asserted the outgoing Chairman of State Bank of India (SBI), Pratip Chaudhuri. “There is a mad scramble for deposits among banks. Some banks are offering upward of 10 per cent on deposits. If the costs go up, the lending rates will also go up. So, it will depend on the trend of deposit rates,” Mr. Chaudhuri said while talking to The Hindu last week.
“The car loans and home loans will get costlier if the deposit rates increase. It does not depend on the repo rate…the repo rate is immaterial, please throw it out of the window,” Mr. Chaudhuri asserted.
He demitted office on September 30 after serving the bank for 39 years in various capacities. Mr. Chaudhuri had taken over as Chairman of SBI on April 7, 2011.
In a free-wheeling interview, Mr. Chaudhuri said that base rate was connected to the deposit rate. “The RBI expects banks to change the rates if repo rate is changed. But banks do not borrow in the repo market. When RBI reduces repo rate by 25 basis points, they expect us to reduce the lending rates by 25 basis points. The RBI has increased the rates (Marginal Standing Facility) by 300 basis points. Can we increase lending rates by 300 basis points? This 7.50 per cent is just a sign board rate … because banks can only borrow 0.5 per cent of their demand and time liability from the repo window. So, the base rate and repo rate connection is very tenuous and weak,” he argued.
Recently, the RBI had increased the repo rate — the rate at which banks borrow from the central bank — from 7.25 per cent to 7.50 per cent while reducing the rate under MSF from 10.25 per cent to 9.50 per cent.
“Base rate is a boon,” said Mr. Chaudhuri. This was introduced in July 2010. It had ushered in transparency and uniformity, he pointed out. “Earlier we had banks lending to a particular company at 6 per cent and to another company at 10 per cent. What is this? It has to be related to your cost of funding. Base rate corrects that. Many of the public sector banks are topline-driven. So, a CEO, at the end of his tenure, can do a whole lot of loans at a throw-away price. So, base rates put a discipline, and people know … if I go to a bank, I can’t get finance at less than the base rate.”
On RBI and the government’s role to revive the economy, Mr. Chaudhuri said that it depended on the RBI’s mandate - whether it was to revive the economy or it was to contain inflation. ``So, if you want to keep inflation low or stabilise the currency…then they have to raise the rates, which means growth had to be sacrificed somewhat. A stable currency, low inflation and high growth are almost like saying…you go out in the rain but don’t get wet. Now, how can this happen? You can take an umbrella or wear a raincoat, but would you not get splashes? So, it depends what you want to do….you want to go out or you want to stay inside.”
To a question on non-performing assets (NPAs) , he said they depended on how the economy performed.
He was also in favour of extending longer period term loans. “We had given an eight-year term loan for a hotel. Now given the cost of capital, it is impossible for the hotel to pay back the loan in eight years. What is wrong if you are given a 12 or a 14 year loan?’’ he said.
“Today, if someone asks for an eight-year loan…I say no thank you … you take a 14-year loan and pre-pay. If you have accelerated cash flows, then prepay. I don’t take a pre-payment penalty. My advise to all companies who are moving into long term loans is: keep your tenor longer,’’ he said.
The fifth paragraph of this article has been changed to reflect the following correction:
The marginal standing facility (MSF) rate reduced from 10.25 per cent to 9.50 per cent and not 11.25 per cent from 9.50 per cent as mentioned in the fifth paragraph of a report “Lending rate hinges on deposits and not on repo rate: Chaudhuri” (Business, October 1, 2013)