Base rate war: Leading PSBs set base rate at 8%

All the big public sector banks announced their base rate—their benchmark rate below which they can't lend. The base rate replaces the opaque benchmark prime lending rate (BPLR). This base rate will include the bank's cost of funds and cost of running the bank.

State Bank of India (SBI) said its base rate is 7.5% while Punjab National Bank (PNB), Bank of Baroda (BoB), Union Bank, Central Bank of India, Bank of Rajasthan, Indian Bank,UCO Bank, IDBI Bank and Indian Bank announced that their base rate will be 8%. Dhanlaxmi Bank has set base rate at 7% while Federal Bank has set it at 7.75%.

So how this new rate going to impact banks and customers? CNBC-TV18’s Latha Venkatesh and Gopika Gopakumar report.

Banks announce base rates; do you think this will bring about transparency in home loan rates? Tell us.

Starting July 1, SBI will price all its new loans above 7.5%. This will be the new reference rate or base rate, which will replace the existing benchmark prime lending rate, which stands at 11%. So does it mean rates change for existing customer? Chairman OP Bhatt says the bank will work out the impact on various borrowers in a day but said he expects only marginal changes for customers.

But what if rival banks announce lower base rates? As of now the big PSUs like Punjab National Bank, Bank of Baroda, Union and Central Bank have refrained from undercutting and announced a base rate of 8%. All the private banks have decided to announce their base rate on Wednesday. So will those with lower base rates snatch customers from those with higher rates, not so says ICICI Bank’s Managing Director and Chief Executive Officer Chanda Kochhar.

SBI's Bhatt said hasn't taken a call on whether he will continue their popular 8% home loan scheme. But added that banks can offer home loan schemes at lower invitation prices, even under the base rate regime.

The fun may start if some private banks like HDFC announce a rate below 7% and try and tempt away some customers. OP Bhatt points out that SBI even now has only 3% of its loans at below 7.5% and adds that the banks can lend to these borrowers through the commercial paper route. PNB sources say that even now they don't lend below 8%. Despite these brave words observers don't rule out a rate war after July 1.

RBI had directed all the banks to switch over to the base rate system from the existing BPLR system with effective from 1 July.

All new loans sanctioned after 1 July and those falling due for renewal from 1 July, (except exempt categories as per RBI Guidelines) will now be priced with linkage to base rate.

The RBI introduced the new lending rate system or the base rate to ensure that larger borrowers do not bargain for cheaper rates from banks, distorting their asset liability management.