The Reserve Bank of India (RBI) has done away with its benchmark prime lending rate (BPLR) system that regulated lending rates of commercial banks. In its place, the RBI has introduced a ‘base rate’, which is likely to come into effect from 1 April 2010. Under its new guidelines, RBI has stated that “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”.
“We believe that this is a positive move by the RBI as it brings in more transparency in the pricing at the same time replacing the inefficient PLR rates which were earlier used as the benchmark,” said Jyothi Kumar, analyst, KR Choksey Shares and Securities Pvt Ltd, in a note.
According to a circular issued by the apex bank, the base rate will be applicable to all new loans. For old loans that come up for renewal, borrowers will have the option to switch to the new system provided they agree with the terms the banks offer. Banks will have to calculate the base rate on the basis of the cost of deposits, adjustment for the negative carry in respect of cash reserve ratio and statutory liquidity ratio, overhead costs and a profit margin. With this system, the RBI hopes that it would usher in transparency in the pricing of lending products, something that was lacking under the BPLR system.
Speaking to Moneylife on the condition of anonymity, an official from Anand Rathi Financial Services Ltd said, “It will bring in more transparency. Right now, there is a lot of lending that happens below PLR, which the customer is not aware of. He does not know what rate is being offered to fellow customers. Therefore, there is no transparency in terms of what rates are being offered on a set of products. There is also confusion because many banks have different PLRs. The base rate is a rate, which the customer knows, will be the lowest rate that could be offered. Thus, it brings clarity in lending.”
Under the ‘base rate’ system, customers can be reasonably sure that they are not going to be under-cut on lending rates like before. The analyst explained, “Transparency rises from the fact that customers know that they are not going to be undercut. Certain customers get preferential rates, below the base rate. Now he knows that preferential rate will be the base rate at maximum. So right now he might be told that he is getting a preferential rate, but that might not be the case. Other customers might be getting at PLR-4%.”
This move of deregulating lending rates will also lead to competition among banks. This is so because the base rates will be known to everybody. For instance, when approaching ABC bank for a loan, a customer will say that XYZ bank is giving him a rate which is base rate plus 2%, and will demand a better rate if its base rate is lower than the ABC bank. Otherwise, he might as well go to XYZ bank. So banks will have to cut down on other costs of lending. It will make banks more competitive, transparent and better in the long-term perspective, said the analyst.
While banks are free to determine their actual lending rates on loans and advances with reference to the base rate, the calculation of the base rate shall include all those elements of the lending rates that are common across all categories of borrowers. Under the new draft rules, banks should calculate their base rate by including the cost of deposits, cost of maintaining the statutory liquidity ratio and cash reserve ratio, cost of running the bank, and profit margin, as per the RBI guidelines.
Meanwhile, according to a PTI report, bankers are believed to have turned down the RBI's suggestion to extend the cheaper home loans to existing customers saying that the move will impact their bottom lines, amid a debate over teaser rates.
Banks, led by State Bank of India, under special schemes offer home loans at lower interest (teaser) rates to new customers for the first few years of the credit period, which has kicked up a storm in the industry.
A month ago in January, the RBI had voiced concerns over 'teaser' rates. Later, it said the cheaper rates should be extended to existing borrowers as well.
"The IBA has said that if banks offer lower rates to old customers as well, this will affect their earnings as it is not feasible for them to change their deposit rates accordingly to compensate this loss of interest arising from such a move," an official of the Indian Banks Association told PTI on condition of anonymity. — Sanket Dhanorkar