Govt banks face base rate heat..........

Lose out to private banks in bill discounting.
Government-owned banks, whose base rates are more than those of their private counterparts, have started feeling the heat.
discounting activity, in which a bank buys the bill before it is due and credits the value of the bill after a discount charge to the customer's account, is shifting to private banks. This is because the discount rate is lower than the base rate of most public sector banks. Banks cannot lend below the base rate, except to a few categories specified by the regulator.
Public sector banks, led by State Bank of India, have requested the Reserve Bank of India to keep bill discounting outside the base rate regime. The regulator, however, sees no merit in the request.
The earnings from bill discounting forms a part of banks’ interest income, while fees and charges come under the ‘other income’ head. Interest rates tend to be low for bills discounted against letters of credit.
“We are absolutely sure about end-use of funds in this case, as it is backed by the letter of credit. As the risk is low, interest rates tend to be very low for these products,” said a senior executive of a public sector bank.
Apart from SBI and Corporation Bank, which have fixed their base rates at 7.5 per cent and 7.75 per cent, respectively, all other government banks have a base rate of between 8 per cent and 8.25 per cent. The base rate of most private and foreign banks is less than 7.5 per cent.
SMEs benefitEffective lending rates in the base rate regime, as compared with the earlier BPLR (benchmark prime lending rate) regime, have been largely unchanged, though some banks’ rates for loans to small and medium enterprises have come down.
The finance ministry had asked the Indian Banks Association (IBA) to collect data from banks for comparing effective rates in the pre and post base rate regime for different categories, including home, education, small and medium enterprises, automobiles, agriculture and personal loans.
According to an IBA official, 60 per cent member banks reported no change in effective rates. IBA has 159 members.
“For example, if the effective lending rate was 10 per cent for a BPLR of 12 per cent, it will be base plus two per cent if the base rate is eight per cent,” the official said.
The official added some banks’ effective rates for small and medium enterprises were lower in the base rate regime. The effective loan rate of some banks is 100 basis points lower in the base rate regime as compared to the BPLR regime.