New Delhi, March 06:The proposed base rate — the new reference rate for determining lending rates for banks — will be implemented three months later than earlier planned. The Reserve Bank of India (RBI) on Friday announced that the new system, which would eventually replace the benchmark prime lending rate (BPLR), would be introduced from July 1 instead of April 1, 2010.
Bankers who met top RBI officials on Friday sought an extension on implementation of the new system. A final circular on the base rate system will be issued shortly taking into account comments received from various stakeholders and discussions with banks. The Reserve Bank had unveiled the draft circular on the base rate on February 10, 2010, for inviting comments from various stakeholders.
“In order to take a final view on the base rate, the Reserve Bank today held a meeting with select public sector, private sector and foreign banks. The decision to introduce the base rate system from July 1, 2010,” the RBI said. Bankers who were present during the meeting included State Bank of India chairman O P Bhatt, Bank of Baroda chairman M D Mallya, Oriental Bank chairman and managing director T Y Prabhu, Bank of India CMD Alok Misra and Syndicate Bank CMD Basant Seth. RBI’s four deputy governors also attended the meeting.
Union Bank chairman and managing director M V Nair said, “Three things that would be kept out of the purview of the base rate regime include staff loan, differential interest rate (DR) and the loans given against the fixed deposits. We will give a choice to our customers to either go for base rate with immediate effect or we will put their loans under the new system whenever their existing loans come for renewal before us.”
“Base rate is meant for new borrowers and we will have to take care of old borrowers also,” Bhatt said. “I think the current BPLR system will continue for sometime.” The BPLR and base rate will both continue until the complete implementation of the new base rate.
In its internal meeting held over the base rate, State Bank of India had demanded that things like staff loans, agricultural and other such loans which are normally much below the BPLR and the festival loans must be kept out of the base rate purview. However, the RBI has considered only the staff loan to be kept out of the base rate. Both agriculture loan and festival offer loans will come under the base rate regime.
“Though each bank will calculate their own base rate, on an average, it should be in the range of 8-8.5 per cent,” said Nair, who is also chairman of the Indian Banks Association. “The base rate will be the minimum rate for all commercial loans, banks are not permitted to resort to any lending below the base rate,” the RBI had earlier said in its draft guidelines on the base rate.
Accordingly, the current requirement that BPLR will be the ceiling rate for loans up to Rs 2 lakh will stand withdrawn. The BPLR system has been drawing flak from various quarters since banks have been lending to highly-rated corporates below their benchmark rate, making the system irrelevant.
As per the RBI plan, the actual lending rates charged to borrowers would be the base rate plus borrower-specific charges, which will include product-specific operating costs, credit risk premium and tenor premium. “All categories of loans should henceforth be priced only with reference to the base rate.
The base rate could also serve as the reference benchmark rate for floating rate loan products, apart from the other external market benchmark rates. The floating interest rate based on external benchmarks should, however, be equal to or above the Base Rate at the time of sanction or renewal,” the RBI said.
Since transparency in the pricing of lending products has been a key objective, banks are required to exhibit the information on their base rate at all branches and also on their websites.
Changes in the base rate should also be conveyed to the general public from time to time through appropriate channels.
—-Agencies