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AGENDA
@ What is base rate and why the move
@ Effect analysis of base rate system

@ Base rate calculation

@ Changing interest rates and risk premium

@ Short term impact on corporate borrowings

@ Overall change in investment activity

BASE RATE
@ It is the minimum rate of interest that a bank is
allowed to charge from its customers.
@ BR came into effect from July 1, 2010. However
all existing loans continue to be at current rate.
@ BPLR is the rate at which a bank is willing to
lend to its most trustworthy, low-risk customer
INTEREST RATE INSENSITIVE BPLR
^BPLRs of public sector banks
have moved from a high of
14.25% in Sep·08 to 12.25% in
Mar·10 and the BPLRs for
private sector banks moved from
15.75% to 14.75%.
^The quantum of movement in
BPLR does not mirror the
changes in policy rates leading
to poor transmission of policy
rates the BPLR of Public sector
banks changed by 200bps while
for their private counterparts
BPLR changed only by around
100bps.
^This is despite the fact that the
deposit rates for Public sector
banks and private banks also
declined by 288bps and 200bps
respectively during the same
period

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EFFECT ANALYSIS OF BR
@ Transparency
@ Transmission of policy rates

@ Impact on Small borrowers

@ Rise in short term borrowing cost

COMPONENTS OF BASE RATE
a) Cost of deposits
b) Negative carry on CRR ad SLR
c) Unallocatable Overheads cost
d) Returns on Net worth
Final lending rate for customers will be the base
rate, plus the risk-cost attached to the credit
rating perception of the borrower by the bank
BASE RATE CALCULATION
AN EXAMPLE OF BR
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Cost of deposits/funds 3.79%
Negative carry on CRR/SLR -0.90%
Unallocated Overheads 0.75%
Average return on Networth 1.14%
INTEREST RATE AND RISK PREMIUM
Essentially, interest is
the price the borrower
pays and a return the
lender earns on his
funds.
Interest rates have an
indirect effect on
equities.
When interest rates
move up, equities as
an asset class tend to
underperform and vice
versa.
This is essentially due
to risk premium,
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 6 which is the function
of risk free rate and
risk averseness of the
investors
HIGH AND LOW INTEREST RATE
ENVIRONMENT

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CORPORATE BORROWINGS
^Companies borrow
mainly to fund their
long-term expansion
plan and for their
annual capital
expenditure.
^However there are
few expenses which
companies have to
fund on continuing
basis irrespective of
levels of interest
rates.
^Hence some amount
of borrowing will
always be made to
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fund continuing
operations like
working capital
requirements.
INVESTMENT ACTIVITY
^Equities as an asset
class tend to
underperform when
interest rates increase.
Investors and market
participants are well
aware of this
correlation.
^Looking at the data, it
is safe to say that when
interest rates are high,
investors prefer to trade
and invest in fixed
income money market
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   6 instruments over equity
stock markets and vice
versa
Thank You