How will banks and the corporate sector deal with the new rate structure and will it lead to a fairer regime?
With the base rate methodology of loan pricing set to kick in from 1st July, banks and companies alike will be gearing up for the paradigm shift it will usher into the Indian banking system. If analysts are to be believed, both banks and corporates will have to adjust themselves to the new system.
This new system is expected to change the way banks look at their loan books and bring about a greater transparency in pricing of loans. For corporates, it means that the days of easy loans are finally over, as they can no longer negotiate for rates lower than the benchmark prime lending rate (BPLR).
ASV Krishnan, senior analyst with Ambit Capital believes that some big companies may actually look for other avenues for funding. "Since banks will not be able to lend below the base rate, big corporates may not go for that avenue any more. They will need to look at alternative instruments. The commercial paper (CP) market will pick up as more and more large corporates will raise short-term funds by floating CP. Banks may subscribe to such papers. So for a bank, instead of generating advances, it will appear in investments."
From the bank's perspective, loan-book growth will need to moderate, feels Mr Krishnan. "The consensus Street estimate is a 20% growth in loan book. But if large corporates do not come for loans, then that will have to be revised downward. The Street may also need to price in a lower credit growth."
Another analyst, Nilanjan Karfa of BRICS Securities feels that current interest rate conditions will affect the corporate sector more than the base rate. "Since the overall interest rate regime is getting tighter, we could very well see RBI raising rates by 25-50 bps in the next policy. The overall liquidity situation is also tighter, which means that interest rates will go up. So this will have more impact on corporate loan rates than the base rate."
He agreed that transparency is, more or less, expected with this mechanism but feels that small companies need not necessarily benefit from the regime. "Earlier, banks used to lend at BPLR less 3%-4%. They used to adjust prices around a constant BPLR. So while Reliance was granted a loan at BPLR less 3%, a smaller company could only manage BPLR less 1%. Now, it will be the other way round. The bank will probably ask for base rate plus 1% from Reliance and base rate plus 2% from the smaller company. The pricing will still be based on the rating of the company you are lending to."
Deepak Tiwary, a banking sector analyst with KR Choksey said, "Earlier, small companies and SMEs used to subsidise the large companies, who were in a better bargaining position. They could ask for rates as low as 6%-7%. That will not happen now. So while large companies will be affected slightly, it is clearly good for the SMEs."
Mr Tiwary believes that the new structure will not impact banks' profitability much. "In case of a rise in interest rates, banks will be able to pass on the burden. It will not make much difference to them. Even in this regime, banks have enough room to manipulate in terms of the time horizon. Also, they can change their methodology to calculate base rate after six months."
The country's largest lender, State Bank of India (SBI) has fixed its base rate at 7.5%. This will set the tone for other banks, who will keep their own rates around the same mark to stay competitive in the market. It is believed that the industry as a whole will fix its base rate between 6.5%-8.5%. The industry is now eagerly awaiting what rate is fixed by the largest private sector lender, ICICI Bank, which is expected to make the announcement tomorrow.
The time has officially come for all banks in the country to move on to the base rate method of pricing loans, as mandated by the central bank, the Reserve Bank of India (RBI), earlier this year. With effect from 1st July, all new loans in the banking system will be priced under the new mechanism, wherein banks will not be allowed to lend below the base rate.
Under the previous system, large companies were particularly used to preferential treatment on the part of banks, as lenders allowed substantial discounts on loan rates in a bid to out-price competitors. This resulted in unfair, discriminatory treatment towards smaller companies, who ended up shelling out much more in terms of interest. But with the new norms kicking in next month, such practices will be mostly muted.
We had suggested yesterday that a reversal can hit anytime. But is this the start of a new leg down? We will know in a few days. Meanwhile, watch 17,400
The market pared all gains accrued in Monday's trading session to close lower today on weak global cues. The Sensex ended at 17,534, down 240 points (1.35%) and the Nifty settled at 5,256, down 77 points (1.45%). The indices started the day on a weak note, taking cues from Asian markets, which extended further losses on a decline in the Chinese market on economic growth worries in the country. Worries about the recent fuel price hike stoking inflation also weighed on investors. Lower opening of the European markets also added to the woes, resulting in the market closing with a deep cut.
Chinese stocks were on a downward trend after a revision by the Conference Board of its April 2010 gauge for the outlook of the country's economy.
Sentiment was also down on lowered pricing range for the Shanghai portion of Agricultural Bank of China's upcoming initial public offering (IPO). The Shanghai Composite was down 4.2% and Hong Kong's Hang Seng lost 2.5%. In other Asian markets, key benchmark indices in Taiwan, South Korea, Japan, Indonesia and Singapore fell by 1.03% to 2.19%.
US stocks were down on Monday as gains in consumer-related stocks, including tobacco shares, were offset by losses in the energy sector. The Dow was down 5.3 points (0.05%) to 10,138.5. The S&P 500 was down 2.2 points (0.2%) to 1,074.5. The Nasdaq shed 2.8 points (0.1%) to 2,220.6.
Back home, the Insurance Regulatory and Development Authority (IRDA) announced drastic changes to Unit-linked Insurance Plans (ULIPs) on Monday, cutting agent commissions, increasing the lock-in period and making it a more risk-based product.
Foreign institutional investors were net buyers of equities worth Rs792 crore on Monday. Domestic institutional investors were net sellers of stocks worth Rs94 crore.
The board of MMTC (down 1.8%) has recommended dividend of 90% on the paid-up equity capital for the financial year 2009-10. It also approved sub-division of each equity share of face value of Rs10 each into 10 shares of face value of Re1 each. The subdivision is to be effective and simultaneous with the allotment of bonus shares in the ratio of 1:1.
IL&FS Transportation Networks Ltd (up 1.1%) has signed a concession agreement with the National Highways Authority of India (NHAI). The company had been issued a Letter of Award dated 3 May 2010 by NHAI for rehabilitation, strengthening and four-laning of the Chenani to Nashri section of NH-1A.
State Bank of India (down 0.3%) has fixed the base rate at 7.50% per annum with effect from 1 July 2010.
Shares of Samruddhi Cement got listed on the National Stock Exchange (NSE) today, post its demerger from Grasim Industries Ltd and amalgamation with UltraTech Cement. The stock opened at Rs579.75 and moved between a high of Rs590 and low of Rs495. The share last traded at Rs509.40. Total traded quantity was 5,67,071 shares and turnover was Rs29.26 crore. Grasim transferred its cement business via a demerger to Samruddhi Cement, wherein Grasim shareholders received one share of Samruddhi (face value Rs5) for one share held. Later, Samruddhi Cement will be merged with UltraTech Cement in the ratio of 4:7.
The company says that the price hike has been necessitated to partially recover the increase in the price of raw material like steel, tyres and castings
Hinduja Group flagship company Ashok Leyland (ALL) today announced a price hike of its entire range of commercial vehicles by up to Rs50,000 on account of rising input costs with immediate effect, reports PTI.
"This price hike has been necessitated to partially recover the increase in the price of raw materials like steel, tyres, castings, etc," ALL said in a statement.
The company has increased the prices of its medium and heavy commercial vehicles by about three per cent with immediate effect, it added.
This hike will translate into a rise of its product prices between Rs20,000 to Rs50,000, the statement said.
On Tuesday, Ashok Leyland shares declined 0.4% to Rs63 on the BSE, where the benchmark Sensex also declined 1.4% to 17534 points.