How will competitors play after SBI sets base rate?

There is a base rate that has been set by State Bank of India (SBI) at 7.5%. Latha Venkatesh does a quick analysis of what the next move might be from the competitors.

Here is the verbatim transcript of her analysis on CNBC-TV 18. Also watch the accompanying video.

A word on how SBI appears to have arrived at 7.5%. This is the minimum rate that banks say they will charge if they have to breakeven, this is the definition of base rate.

SBI sources tell us that they have taken the six month deposit cost as their cost of money which stands at 5.4%. To this they have added 55 bps of money that they lose because they have to maintain a cash reserve ratio (CRR) of 5.5% as well as a statutory liquidity ratio (SLR) in which they have to compulsorily put money in government's GSecs. That is another 55 bps so that is 5.95%.

The remaining to reach 7.5% is the unallocated costs of running the bank as well as an estimated profit margin.

So basically that is the two elements that banks will play around with. What will the others do? Chances are that when big boy SBI with 25% of the deposits in the country says 7.5%, most of them will say 7.5% as their base rate.

Some competition is expected to come from the private sector banks which earlier in June told us that they will just follow the dictate of the market. If the market is giving money to AAA companies at 6.5% then 6.5% will be our base rate is what they told us.

So assuming that they take 6.75% since rates have become a little sticky now because of the tight money situation, chances are that some competition could develop if some people say 6.75% as their rate.

AAA companies at the moment borrow between 6.5% and 6.7% for one year money.
So will SBI not lend to them because under the rules they cannot lend below base therefore what happens - do they congregate to HDFC Bank or those who may choose to announce lower base rate or will they simply go to the CP market.

These are the things which we need to understand. It’s at this moment a touch and feel game, no one knows what will happen perhaps it will be up until September 30 when all banks will get a chance to revise their base rate that we will know what will be the base rate and how it will impact corporate, banks and more importantly retail investors.

At the moment what bankers tells us is that nothing will change.

SourceL:-www.moneycontrol.com