Major changes in interest rates expected with switch to base rate system

Some major changes relating to interest rates on loans are on the way and are expected to become effective from 1 July. Top corporates should expect to be ready to shell out more by way of interest on borrowings while many smaller companies will see rates coming down with the deadline fast approaching for the banking system to migrate to the base-rate system from the opaque benchmark prime lending rate (BPLR) system.

The current practice of lending to blue chip companies at sub-PLR rates (interest rates below the BPLR) is set to end as under the new system discounted rates will not be permissible.

Meanwhile, speculation is rife regarding which lender will announce the base rate first and the lowest rates on offer. SBI chairman OP Bhatt indicated last week the lender's base rate would be in the range of around 7.50-8.50 per cent.

However, according to banking industry, some surprises from private banks can be exected with at least one of them talking of a base rate of 6 per cent.

In their bid not be outsmarted by the competition bankers are now in the final stages of calculating the base rates that could vary 6-10 per cent from bank to bank.

Public sector banks have access to government / treasury funds, which keeps their cost of funds lower than private sector banks.