The newly introduced Base Bank Rate replacing the Benchmark Prime Lending Rate (BPLR) is likely to be costlier for highly rated corporates raising funds through banks, while small companies would be able to negotiate rates to their advantage.
“The introduction of the new regime would make raising money through banks costlier for highly rated companies,” reveals a FICCI survey on Base Bank Rate implementation.
Credit offtake
These corporates might resort to other low-cost financing options such as Commercial Paper (CP), Qualified Institutional Placement (QIP) and External Commercial Borrowing (ECB) which could result in lower credit offtake of banks,” it added.
However, the survey reveals that small companies would be able to negotiate a good rate for themselves. According to the respondent banks, the new system is transparent and the small borrower should be able to ‘negotiate the rates' to their advantage. As the base rate of all the banks would be publicly available, companies will be able to compare the rates charged by banks; hence the skill to negotiate will have a greater role to play.
Views sought
The survey sought the views of bankers and economists as to how things would pan out after the base-rate regime is implemented from July 1 and what impact will it have on small and big companies.
As per the recommendations of the working group on BPLR constituted in the annual policy statement of 2009-10 to review the BPLR system and suggest changes to make credit pricing more transparent, the Reserve Bank of India (RBI) has decided that banks switch-over to the system of Base Rate with effect from July 1.
The committee recommended to the apex bank that banks switch-over to the system of Base Rate aimed at bringing transparency to lending rates and enabling better assessment of transmission of monetary policy.
Transparency
According to the working group, the BPLR has tended to be out of sync with market conditions and does not adequately respond to changes in monetary policy. In addition, the tendency of banks to lend at sub-BPLR rates on a large scale raises concerns of transparency. The working group also noted that on account of competitive pressures, banks were lending at rates which did not make much commercial sense.
In addition to promoting transparency, the Base Rate methodology does allow banks to charge borrowers Base Rate plus borrower-specific charges, which will include product-specific operating costs, credit risk premium and tenor premium. Besides, concessions are made in certain cases such as education loans, credit to small borrowers (up to Rs. 2 lakh) and loan tenor below one year.
Findings
Majority of the bankers surveyed did express the feeling that there is a high probability of a ‘slight' upward bias as far as lending rates are concerned. However, the degree of impact will differ from borrower to borrower and across sectors. While an upward pressure on rates for corporates availing of at ultra-low rate is imminent, the retail, priority and SME products will most-likely be able to get a relatively lower rate. Needless to mention, irrespective of the category, borrowers with better credit rating will be able to negotiate a good deal for themselves.
Apart from the base rate, other important determinants of future lending rates will be RBI's monetary policy stance and pick-up in credit demand. While bankers are optimistic about the credit demand, they are apprehensive of monetary policy. If the policy indicates further tightening there could be a consequent squeeze on liquidity, which will have an upward bias on base rate.
Treasury operations
Although the base rate range given by public sector banks is 8-9.5 per cent, private sector banks could settle at higher end of the range. However, most banks feel that the base rate will be governed by the liquidity conditions in the market and each bank's cost of raising funds. They are expected to expand their fee-based income business to negate the adverse impact on banks' bottom line. They would also pursue more low-cost borrowings. Some respondents also foresee an aggressive treasury operations and levying of service charges to cancel any negative impact arising out of squeeze in profitability as banks could end up paying more to depositors without a corresponding increase in their earnings once base rate is implemented.
Advantage
Bankers were unanimous in their view of CASA-heavy banks having an advantage in the new regime. Higher proportion of CASA (current account savings account) in total deposit would certainly offer more flexibility in maintaining a relatively lower base rate and hence will also play a decisive role in improving margins.
There cannot be a second thought on the fact that CASA-heavy banks will have an upper hand in base rate pricing as cost of deposit is the single most determinant in base rate calculation.
Public sector banks will have an edge over private sector banks in offering a more competitive rate as they have a larger deposit base which gives them access to cheaper sources of stable financing. Public sector banks have access to the government/treasury funds and thereby their cost of funds works out to be lower than private sector banks. Bankers were clearly of the view that post-base rate regime highly rated corporates will find it costlier to raise money through banks. Hence, banks may find it difficult to retain the high-rated corporate portfolio.
