Home / Business / Money / Base rate calculation: Why banks are hurting from RBI move

Base rate calculation: Why banks are hurting from RBI move

The Reserve Bank of India’s September proposal to ask banks to move to the marginal cost method to calculate their base rates has left some banks jittery. Bankers say the move, on which detailed guidelines from the central bank are expected soon, will impact institutions with greater exposure to fixed tenure loans and impact profitability.

The Reserve Bank of India’s September proposal to ask banks to move to the marginal cost method to calculate their base rates has left some banks jittery. Bankers say the move, on which detailed guidelines from the central bank are expected soon, will impact institutions with greater exposure to fixed tenure loans and impact profitability.

The base rate is a rate set by a bank below which it cannot lend. Banks currently use a number of methods to calculate their base rates, such as using their average, blended or marginal cost of funding.

But amid a perception that banks have of late been slow in lowering their base rates in response to the central bank’s decision to lower its key repo rate, the RBI came out with the proposal suggesting banks move to the marginal cost benchmark.  Under this, banks will have to use the latest interest rate payable on current and savings accounts (CASA) and term deposits of various maturities as one of the key variables in calculation.

In an interview with CNBC-TV18, VG Kannan, Managing Director of country’s largest public-sector lender State Bank of India , said the RBI should allow for a more calibrated move towards shifting to the new method instead of asking banks to move immediately.

“Also, I hope the Reserve Bank, before announcing the policy, back tests its decision to assess how the base rates rise in a rising interest rate environment,” he said.

Kannan said banks that have low CASA deposits will stand to be impacted more from the shift, seeing an overall impact of anywhere between 10 to 25 basis points on the net interest margin (NIM). Deposits, along with market borrowing, are the chief sources of funding for banks.

Banking analyst Parag Jariwala of Religare Capital Markets agreed with Kannan’s views on the margin impact, and said PSU banks such as SBI, Bank of Baroda and Punjab National  Bank — which have higher exposure to corporate loan book — will be impacted.

Interview transcript to follow.

Leave a Reply

Scroll To Top