With just about two weeks to go for banks to put in place a base rate, below which they cannot lend with a couple of small exceptions, theres plenty of guesswork on about where the rates will settle. One surprise that a Ficci survey of bankers has thrown up is that the rate fixed by private sector banks will be higher than those set by public sector banks.

So far, the general consensus has been that the private sector banks will actually fix the base rate anywhere between 25-50 basis points lower than their competitors in the public sector because they are believed to be more efficient.

Its possible that a couple of private sector banks that have traditionally paid out a higher rate for term deposits may fix the base rate at levels that are similar to those of public sector banks. Also, there are some smaller private sector banks, both old and new, which are compelled to pay higher fixed deposit rates to attract customers since they have smaller branch networks.

However, its very unlikely that the bigger and efficient banks such as HDFC Bank or Axis Bank will come up with a base rate thats higher than the rate put out by State Bank of India. While the SBI chairman has indicated that the rate for his bank could be somewhere around 8%, its likely to be a little lower than that perhaps closer to 7.5%.

Thats despite the fact that inflation for May came in at 10.2% and rates are clearly headed up. After all, demand for credit is expected to be higher this year and theres less liquidity.

So theres been little difference of opinion on the fact that key policy rates will move up by about 75-100 basis points between now and March 2011 and talk of an inter-meeting rate hike by the central bank has resurfaced.

So the base rate could be a convenient trigger for banks to increase rates in general. Interestingly, no bank has raised term deposit rates over the last month though a few of them had tweaked rates in February.

Its unlikely SBI will want to outprice itself; after all the base rate is a floor rate and it can make up through an adjustment in the spread charged to the borrower.

Despite its size and reach, SBI has faced stiff competition, in some segments, and will therefore, not want to lose good customers. Its possible though that the public sector banks will price themselves as close to SBI as they can; at least in the initial stages till things settle down. If some banks are worried they would lose out because of competition in the banking industry they neednt be.

For sure, they will have to fight harder for good customers but with the economy in good shape there should be more of them. Also, cash credit facilities can never replace Commercial Paper, which is short-term in nature and theres only that much companies can borrow overseas. So cash credit will never go out of fashion. But yes, banks need to be smarter and more innovative now; if it works the way it should and not like a cartel, the base rate regime will tell the men from the boys.