State Bank of India Sets Minimum Lending Rate at 7.50% Under New Regime

State Bank of India, the nation’s largest, set its minimum loan rate at 7.5 percent, beating a July 1 deadline by the regulator for lenders to shift to using the so-called base rate system for pricing loans.

The lending rate will go into effect July 1, the Mumbai- based lender said in a filing to the Bombay Stock Exchange today.

The new regime bars State Bank and its rivals from offering most loans at below the base rate as the Reserve Bank of India seeks to increase transparency in borrowing costs and push lending rates to more closely reflect changes in monetary policy. Analysts at brokerages including Macquarie Research’s Suresh Ganapathy said most borrowers’ costs won’t change significantly.

“Lending rates will remain competitive,” Kajal Gandhi, an analyst at ICICI Securities Ltd., said by telephone from Mumbai on June 15. “The main objective of the move was to standardize lending rates and issue transparency into the system.”

Most banks may set their base rate at 7.5 percent to 8.5 percent, Macquarie’s Ganapathy said in a note to clients June 7.

Shares of State Bank rose 0.8 percent to 2,322.70 rupees as of 10:24 a.m. local time, extending its gains this year to 3.8 percent. The Bombay Stock Exchange’s banking index has climbed 7.8 percent this year, compared with the Sensitive Index’s 1.2 percent advance.

Banks may set the base rate, reflecting costs and other elements that are common across all categories of borrowers, using any benchmark, the central bank said on April 9. The lenders will also be allowed to change the benchmark and methodology used until the end of December.

Risk Assessment

The new regime “brings to fruition over two decades of efforts to deregulate the lending rates of banks,” Reserve Bank of India Executive Director Deepak Mohanty said in Kolkata on June 11. The base rate “is expected to be more responsive to the stance of monetary policy,” and prompt banks to better assess risk in pricing of loans, he said.

India’s central bank began easing its control over banks’ lending rates in the early 1990s as part of wider financial- sector reforms, Mohanty said. The system of using benchmark prime lending rates, started in April 2003, fell short of the regulator’s objective of bringing transparency to lending rates as banks were allowed to offer credit at below the BPLR.

That led to a “disconnect” between the published rate and the actual borrowing cost, First Global Research said in a note to clients in March. State-run banks, for instance, offered credit at rates ranging from 4.25 percent to 18 percent in September, while the BPLR was 11 percent to 13.5 percent, according to the report.

‘Justify the Rate’

The new regime continues to give too much flexibility to banks to decide the pricing of loans, according to Macquarie’s Ganapathy.

“Lending rates will continue to be determined by the level of competition in the market,” he wrote. “The base rate just forces banks to justify the rate that they charge to a borrower without arbitrarily quoting rates.”

Still, large companies may now be forced to turn to the commercial paper market for short-term borrowing as banks would find it harder to justify providing working capital loans at 4 percent to 5 percent under the new regime, Ganapathy said.

Ending use of the BPLR, which served as a ceiling rate for loans of as much as 200,000 rupees, may increase the flow of credit to small borrowers, Mohanty said, and set up bank credit as an alternative to money lenders.

To contact the reporter on this story: Chitra Somayaji in Mumbai at csomayaji@bloomberg.net; Ruth David in Mumbai at rdavid9@bloomberg.net

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