India’s largest bank State Bank of India (SBI) has set the benchmark for the banking industry by pegging the base rate at 7.5%.
SBI is well positioned to fix the base rate relatively low, given its high share of low-cost current and savings bank account or CASA deposits.
The bank’s share of CASA deposits at 47% is second only to HDFC Bank. Thanks to this large base of CASA deposits, SBI’s cost of deposits aggregated 5.8% in FY10, which was one of the lowest in the industry.
Few banks in the country can count for 30% of their deposits being in the CASA category. This primarily includes smaller banks, which have lower CASA deposits. These banks have little choice but to settle for a higher base rate, which is bound to hobble them when up against competition.
Two other large state-owned banks, Bank of Baroda and Punjab National Bank, have pegged their base rate at 8%. While BoB had a share of 36% of CASA deposits in FY10, Punjab National Bank was in a better position at 41%. For SBI and these two banks, maintaining their NIMs should not be much of a challenge, but what would be interesting to see is how these lenders price loans for the bluest of blue chips.
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