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Will base rate pressurise bank profitability?

Created by : Adrija , Assistant manager finance , HDFC Bank  | 07 02 2010 12:02:06 +0000
Industry : BankingFunctional Area : India(Markets)
Keywords : base rate bank profitability
Activity:  494 views;  last activity : 07 08 2010 07:54:51 +0000

Presently, the base rate for public sector banks is in the range of 7.5%-8.25%, while that for private sector and foreign banks is lower by 50-100 basis points. According to CRISIL Ratings, the large private sector banks with more competitive base rates are now better placed to garner market share in the short-term corporate lending space.

However, public sector banks with superior treasury operations can partially offset competitive pressures in the short-term lending segment by subscribing to the debt market issuances of corporate. In the long-term lending space, a material shift in market share is unlikely. CRISIL Ratings believes that the banks will set lending rates that are near the current levels.

So users, will base rate pressurize bank profitability?

  
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Inflation is at higher side. RBI increases REPO and Reverse REPO rate which will increase the cost of short term borrowings from the bank. if the inflation is towards northern side, RBI has no other alternative except to increase the bank rate. This again increase the cost of borrowing. Hence bank has to do business in the competitive environment, it cannot increase the lending rate but it has to increase the deposit rate. This will affect the banks profitablity in the short term.
By V VASU, Audit Manager, SUNDARAM FINANCE LIMITED  | 07 08 2010 07:54:50 +0000
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Yes , definitely it will affect the banks profitability.
By Pritesh Jain, Credit & Sales Manager-Two Wheeler, Bajaj Auto Finance Ltd  | 07 03 2010 17:01:08 +0000
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Iam not full aware about this base rate
By Madhusekar.N , Accounts Manager, IHD Industries Pvt.Ltd.  | 07 03 2010 07:03:16 +0000
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We understand Base Rate .. ? This is a new concept introduced by RBI, the apex bank of India.

When its new, how can we say that so and so Bank had  ... this and this rate as 'base rate' ? Ridiculas.

It is known in India that Private Sector banks, most often, charge higher ( exorbetent ) rate of interest, some are hidden. Corporates were 'enjoying' free meal from some Banks. SME/ Small Loan/ Agril sector  etc. were suffering.

Yes, Base Rate may hinder Banks to gurner hefty profit. PSU Banks never think that they were/ are in Market 'onlt 4profit" ... they have to manage things like a gentleman in new scenerio. 

At the end ... the tiny/ Medium loanee members may say thanks to RBI and none other.
By ASOKE KUSARI, Domestic Private Banking-Executive/Manager, A large leading PSU Bank - India  | 07 02 2010 17:39:44 +0000
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Yes, I do at one  on the view that changed base rate will effect bank profitabiliyt. As the base rate is the benchmark rate below which no can avail the any loan. As earlier when coporate entity or esteemed client of banks having strong creditworthiness were able to access the loan cheaper rate but now they would not be able to avail such profit inspite of having good credit. As the base rate of SBI is 7.5 % and PNB is 8% and other's bank is hovering around this the corporate entity would be compelled for debt issuance for their short run capital requirement and for long run they can go for public share issuance. Even as per the new norms every listed company must have 25% public holding thereafter bank profitability will be also get impacted. But as far private intituions is concerened as their base rate is below 25-100 basis points but they are at the competive stage but as far public banks are concered their operating cost is similar in mostly cases so base rate among public banks could be uniform or their might be slightly variation. In a nutshell firms having good market repo will seek for any other source for fund arrangement if lending rate are not able to lure them.
By Murli Gupta, Auditor, Ujjivan Financial Services  | 07 02 2010 16:08:12 +0000
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Schedule Banks are not even survive of their base rate at present but Private banks are more profitable in their base rates.
By puttappa , Accounts Manager, GVPR Engineers Limited  | 07 05 2010 06:20:31 +0000
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there will be some competitive pressure but we also have to see the margins of pvt banks being hit when compared to that of public sector.even the ove all market rate is around 7.5 to 8(approximately).also that only pvt sector alone cannot meet the whole demand and it has its own limitations and regulatory requirements.i think public sector bank should be ale to maintain their profitability
By sairam , CA student, ICAI  | 07 03 2010 06:19:35 +0000
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No, Base rate will not pressurise profitabilty of the bank. Here base rate refers to repo rate at which commercial banks borrow funds from RBI or from other commercial banks. What ever the base rate the additional burden will be passed on to the end user. So it will not affect the bank's profitabity instead it is either beneficial or adversity to the end user depending on the base rate of the bank.


By mazhar hussain, MBA/PGDM student, niilm school of busines bangalore  | 07 02 2010 19:13:05 +0000
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No, Base rate will not pressurise profitabilty of the bank. Here base rate refers to repo rate at which commercial banks borrow funds from RBI or from other commercial banks. What ever the base rate the additional burden will be passed on to the end user. So it will not affect the bank's profitabity instead it is either beneficial or adversity to the end user depending on the base rate of the bank.
By Arun Kumar K, Security/ Equity Research Analyst, Thomson Reuters  | 07 02 2010 14:53:58 +0000
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Introduction of the base rate in the Indian banking system will enhance competition in the short-term lending space as corporate shift to the debt markets, leading to increased issuance. Banks with competitive base rates and efficient treasury operations will benefit from the new scenario, but competitive pressures are unlikely to impact the overall profitability of the banking system materially.
By Adrija , Assistant manager finance , HDFC Bank  | 07 02 2010 12:02:06 +0000
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Mam, when someone publishes a study or research it means there is fair amount of truth into it. You just cannot brush off the matter saying it is fake. If so then you should resonate.
Thanks Manish btw many here are too old for this :) MR. Murthy the link of your blog :)
As such I am not satisfied by the sides given. But the question that should be raised is that why should there be an increase. They already have enough what more do they want?
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