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New interest rate regime from today
Published on 30 Jun. 2010 10:25 PM IST
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A new interest rate regime, aimed at improving transparency and disallowing big corporations to get loans at rates below established benchmarks, will kick in from Thursday as part of a new rule that requires banks to set their minimum lending rates.
Major state-run banks have announced their respective minimum lending rates, or the base rate - the minimum interest a bank has to charge on its loans - between 7-8 percent.
The Reserve Bank of India had in February dismantled an earlier system of determining interest rates -- benchmark prime lending rate -- which was discriminatory to smaller borrowers. As per the BPLR system of determining lending rates, banks could charge varying interest on different categories of borrowers.
Businesses benefited from the system, with loans to them being routinely given at below BPLR rates, resulting in a situation where small and individual depositors ended up subsidising the corporate loans.
State Bank of India was the first to fix its base rate at 7.5 percent per annum Tuesday, setting the benchmark. Other public sector peers announced their rates soon after. Bank of Baroda, Punjab National Bank, Union Bank, Bank of India and Central Bank of India pegged their base rates at 8 percent per annum. Dena Bank fixed the base rate at 8.5 percent, while Syndicate Bank and Indian Overseas Bank kept it at 8.25 percent.
With the new norm coming into play, no bank can give out funds at an interest rate lower than the base rate, and will lead to better transparency.
Even though the computation of interest will be done using the new benchmark, the effective rate of interest on existing and new loans are not expected to change.
If a person is paying 10 percent interest on a home loan, a bank with an 8 percent base rate will work out the interest payable as base rate plus 200 basis points.
The lowest base rate declared till date is by SBI which controls almost one-fifth of the total loans and advances in the country, will give tough competition to other private lenders and some of its peers to come up with a matching deal.
Markets are keenly watching what ICICI Bank, India’s largest private lender, does, with its announcement on the base rate due Wednesday.

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