SBI fixes base rate at 7.5 percent

The country's largest lender, State Bank of India (SBI), on Tuesday, fixed its base rate for lending at 7.5 percent per annum which would kick in from July 1.

The base rate is the minimum interest a bank has to charge on its loans. The Reserve Bank of India had in February dismantled an earlier system of determining interest rates -- benchmark prime lending rate -- which was discriminatory to smaller borrowers.

As per the BPLR system of determining lending rates, banks could charge varying interest on different categories of borrowers.

Businesses benefited from the system, with loans to them being routinely given at below BPLR rates, resulting in a situation where small and individual depositors ended up subsidising the corporate loans.

But with the new norm coming into play, no bank can give out funds at an interest rate lower than the base rate.

Each bank can, however, determine their own base rate, and most banks are in the process of announcing theirs before July 1.

The new base rate by SBI, which controls almost one-fifth of the total loans and advances in the country, will give tough competition to other private lenders and some of its peers to come up with a matching deal.

Markets are keenly watching what ICICI Bank, India's largest private lender, does, with its announcement on the base rate due on Wednesday.