SBI has planned to scrap annual interest rate reset clause on loans

By | May 16, 2011

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.

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About Pradeep Yuvaraj

Pradeep Yuvaraj is a Co-Founder and Director at Finerva Financial Solutions Private Limited, a financial education company focused on personal finance education. He has penned over 250 articles relating to Personal Finance and clocked over 500 hours of educating individuals on managing personal finance. He is a serial entrepreneur and has been associated with 7 Start-ups. His entrepreneurial experience spans industries as varied as Education, Gas Engineering, Automobile Design, Software development and more recently a Pure play presentation design company. Prior to turning entrepreneur in 2005, he has worked for 3 of the top ten companies of the world - Shell, ExxonMobil and Total SA. This experience included handling Branch Operations, Channel Sales and Business Development across 5 states over a period of 8 years. He holds an MBA from Symbiosis and an Electronics Engineering Degree from the University of Pune.

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