- The actual charge of interest under base rate will be base rate plus profit element of bank( thus removing profit element from base rate definition written in my earlier article). If SBI base rate is 8% which is actually its cost element overall , then it can charge additional 1% as profit thus charging the customer at 9%.At the most, it can charge base rate itself i.e. 8% which is minimal thus sacrificing profit element by way of offering cross selling in getting some fixed deposits etc.
- The cost of borrowing will be lower for ‘AAA’ rated banks like the State Bank of India than other banks which do not have such ratings. So Banks below the category of ‘AAA’ may find the competition tougher and hence they will attempt to lower costs of banks. Either they will go for more mechanisation and reduction of manpower.
- The current and savings account (CASA) ratio will be the driver of cost of deposits. The higher the CASA, the lower will be a bank’s cost of deposits. CA ( ie.current account) will be cheaper for banks as it involves no interest whereas SA(savings accounts) involve 3% interest on daily balance. For example, State Bank of India’s (SBI) CASA ratio as on 31st December, 2009 stood at 43%. On the other hand, Corporation Bank’s CASA ratio as on 31st March, 2010 stood at 28%. As a result its base rate is 8% for SBI whereas 8.5% is base rate for corporation bank.
- The best rate of a loan depends a lot on maintaining a clean credit history. This is recorded by the credit bureau (until recently only CIBIL had the monopoly but now Equifax India also captures credit information) for use of lenders (banks or NBFCs). Good repayment track record will not only ensure quick approval but also lower rate of interest for customers.
- The existing customers who are having loans like housing, car, industrial loans etc. can apply to their bankers to reduce their interest rate if they found the base rate plus their profit margin which is more or less 1% to 1.5% is less than their present loan rate. It will help for the customers of banks under low base rate.
C.R. Venkata Ramani