End of BPLR: RBI to de-regulate lending rates in FY11

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Q: What will the implications of this move be on banks? How will they be affected?

Bandyopadhyay: That is very critical. All the banks have started looking at the numbers and it is on their drawing board. The most important impact that it could have on their NIM or net interest margin, on the cost of money and the earnings on that money which the banks make.

So at this point of time, I don't think there is a clear picture. But as long as savings rate is not de-regulated, which is on the liability side, which they will continue to pay 3.5%, there won't be much of an impact but they will earn more on these loans at this point of time, on the private sector loans and export loans. They will earn marginally more than what they have been earning.

But at this same time because they will be forced to bring down their prime lending rates, their earnings on the rest of the loan book will go down. So I think this will be balancing factor. There won't be either negative nor a positive at this point of time.

It could be bank specific. But definitely public sector banks will be at an advantage because all these norms particularly with regard to the public sector banks they have been used by the government and RBI to dole out money at concessional rates to various segments.

Q: Would you agree that the savings rate liberalisation will happen so quickly. That was not quite part of your report and secondly if the base rate is not linked to the deposit either one year or any deposit rate doesn't it mean that your report has not been implemented at all?

Rammohan: To answer your first question, certainly if the savings rate is de-regulated over time then certainly it is bound to have some impact on the NIM. There the question is one of timing as to when you want to do this.

My own sense is that perhaps now is not the most opportune moment to do that. Once we have a full-fledged recovery and we are clearer about the NPA situation, let's say the economic growth goes up to 8-9%, then perhaps that is the point at which the RBI can consider this because even if the NIMs are squeezed, the overall profitability of banks may not be significantly impacted. So now is perhaps not the best time to do that.

As far as your second question goes as to what will happen if the RBI doesn't implement that particular recommendation of ours, which is to link the base rate to the one-year deposit rate, remember that there is a safeguard built-in there in that report which is that the proportion of sub-PLR loans cannot exceed 15%.

Now once you have that condition even if banks are given the freedom to use whatever benchmark they like and not the one year deposit rate, that freedom could turn out to be notional because if you are going to use two-year or three-year rates or historical rates, you may not be competitive in the market.

So, yes, the RBI could say that you could use one year deposit rate or anything else as a benchmark, but I doubt that banks will have an awful lot of freedom on that account because they will not be competitive. And they can't price more than 15% of their loans at sub-BPLR rates. So that is going to limit their room for maneuver of banks.

So, by and large if we have some players that are going to use the one year deposit rates as a benchmark, and I am sure there will be some, then more or less the system would be forced towards that. I can't see that banks will have much of a choice.