According to the Reserve Bank of India (RBI) from April 1 banks were to give loans on base rate system but on the request of the bankers RBI has postponed the implementation of base rate system for 3 months.
Bankers are still confused about the parameters for calculating the rate. In this regard bankers met RBI deputy governor on Friday. In the meeting bankers have requested RBI to give free hand for selecting the parameters for calculating the base rate during the first year of the new regime.
According to the new formula for calculating rate, the base rate will depend on the cost of deposit, adjustment for the negative carry in respect of cash reserve ration and statutory liquidity ratio, overhead costs and a profit margin.
Bankers, who met RBI deputy governors on Friday, discussed the issues regarding the parameters for calculating the rate.
According to the formula proposed by the regulator, the base rate will depend on the cost of deposit, adjustment for the negative carry in respect of cash reserve ratio and statutory liquidity ratio, overhead costs and a profit margin.
But banks are not sure over what parameters they have to use for arriving at the cost of deposit and the profit margin. For example, in case bank use overnight cost of funds as the parameter then the cost of deposit can be negligible. If bank finally decides to take a particular parameter to indicate cost of deposit or profit margin, it will not be able to change it.
State Bank of India Chairman OP Bhatt said, “We have requested for allowing us to change the parameter at least in the first year of operation (of the new regime).”
He said SBI is thinking of taking the average cost of deposit as the indicator for its cost of deposit. Bhatt added, “We have not decided the indicator for profit margin, but we can opt for net profit, though it can be very volatile.”
As for now, RBI has given free hand to banks to decide the parameters banks are trying to work out the methodology to be adopted by competitors. In case bank opts for short-term deposits as the benchmark for calculating the cost of deposit, its base rate will be low.
The banks have got three months time to work out parameters before entering the new regime.