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Base rate could hit profits: banks

business Updated: May 17, 2010 21:13 IST
Mahua Venkatesh

As the countdown begins for a new interest-rate regime in India, banks are concerned that the proposed “base-rate” system will squeeze profitability as they could end up paying more to depositors without a corresponding increase in their earnings.

The Reserve Bank of India (RBI) has asked banks to be more transparent in the way they charge interests rates from borrowers and will introduce a new concept called “base rate” from July 1 that would serve as the minimum rate for all loans.

While each bank may decide its own base rate, it will be calculated on the cost of deposits, the banks’ administrative and operational costs and statutory costs. Banks fear this would reduce their profit margins.

T.M. Bhasin, CMD, Indian Bank told HT that banks would focus on increasing other incomes through the non-conventional sources. “Though there could be some pressure but it would not affect the bottomline in any manner as we are already looking at increasing other incomes through several channels, such as bancassurance, we will also focus on fee-based income,” Bhasin said.

The new base rate will replace the existing benchmark prime lending rate (BPLR).

At present, 70 per cent of the total loan portfolio, which is directed towards the corporate sector, is provided at a rate below the benchmark prime lending rate.

According to the formula proposed for calculation, base rate will be based on banks’ cost of deposits, statutory liquidity ratio, adjustment for the negative carry in respect of the cash reserve ratio and the overhead costs and profit margin.

“There could be some squeeze on profits for banks for the current fiscal but there is no cause for concern,” said T.Y. Prabhu, Oriental Bank CMD.