A recent press report said that the State Bank of India has planned to scrap the annual interest rate reset clause on all loans and move to uniform base rate-linked payments to smoothen out the fluctuations in its profitability.
Mr. Pratip Chaudhuri, chairman of SBI said that most term loans have one-year reset clause, which is burdensome both for the company as well as for the bank so the bank has decided to give term loans which will be linked to the base rate. The bank will not lend below the base rates. He also said that the banks’ profitability will get crushed when there is movements in interest rates as borrowers are charged with a lag effect, while deposit rates rise immediately.
The bank will hence forth give all its loans linked to its base rate, which is now fixed at 9.25%. He said that corporate looking at long-tenure loan often bargain for a term loan where interest rate is fixed for at least one year.
Reports also said that SBI has decided not to compromise on margins to retain clients, and the bank has also decided to give a prepayment option to customers who feel that loans have become expensive. Mr. Chaudhuri, said that the bank will focus on long-tenure loans.