The public sector banks (PSBs) seem to be losing out to their private counterparts in the base rate game.
The PSBs have set their base rate at higher ranges than private banks and they have started feeling the difference.
The bill disounting activity is making a shift to the private banks. It is a process in which the bank buys the bills receivable from the customer and pays him the amount before the bill is actually discounted but after deducting some discount charge.
Now the discount rate is much lower than the base rate set by the PSBs and base rate norms clearly specify that banks cannot lend below base rate. This has put these banks in a fix.
The earnings made from bill discounting forms part of interest income of banks while fees and charges come under the head 'other incomes.'
"We are absolutely sure about end-use of funds in this case, as it is backed by the letter of credit. As the risk is low, interest rates tend to be very low for these products," said a senior executive of a public sector bank.
Barring SBI and Corporation Bank, all other PSBs have their base rate in the range of 8 to 8.25%. SBI has set its base rate at 7.5% while Corporation Bank has set 7.75% as its base rate.