In the pre-reforms era, it was a regulated, administered and directed regime. RBI used to fix up the interest rates - be it for deposits or advances and advise the bankers (public, private or foreign) to follow. All the lending also was at the directions of the regulator or government and the banks has almost least opportunity to choose their customers. Come reforms, out of the several changes introduced, deregulation of interest rates on deposits (except Savings Bank a/cs) and loans (above Rs. 2 lacs and DRI scheme loans) have been left to the market forces and banks were given free hand to decide and earn profits. Simultaneously several other accounting changes like shift from accrual basis of interest calculation to actual method were introduced. In the process, a competitive scenario set in and there was a level playing field in the industry.
A new concept called Prime Lending Rate (later Benchmark Prime Lending Rate) mechanism was introduced. Banks were closely revieing the market conditions, their own Assets and Liabilities in the Balance Sheet on almost daily basis and offer new products and services as also price them very scientifically. This year, there is again a departure in the Interest Rate mechanism. A Committee recommended to bring in Base Rate of Interest policy in place of BPLR. Any bank, in order to earn profits and sustain, has to recover its cost of funds (deposits and borrowings), administrative expenses and allow for a decent profit margin (Net Interest Margin) and then fix its lending rates. They have obligation to comply with the 40% Priority Sector Lending to Agriculture and Small & Medium Industries / business too. Similar offer to be given to Exporters and others. So, they have got to follow differential pricing catering to different types of customers in their portfolio.
SBI announced its Base Rate at 7.5%. http://www.thehindubusinessline.com/2010/06/30/stories/2010063053890100.htm Other banks were waiting but hoping to fix this rate at around at least 8 to 8.5% pa. Syndicate Bank, PNB and some more are likely to announce their rates today because the effective date for Base Rate implementation is July 01, 2010 (it was already postponed from April 01, 2010). It is likely that a scenario of interest rate was is going to emerge in the coming fortnight because every bank would like to comfort its borrowing customers as also the depositors. RBI Monetary Policy review is going to be held on July 27, 2010. Inflation is at double digits. Banks' profits can not be squeezed with a trend of increasing Non Performing Assets in general. We need to wait and watch the happenings now.