Bank Overhaul in India

Bank Overhaul in India

Indian Banks will adopt a new system of Base Rate based lending system from July 1st, 2010. Till now, banks were following Benchmark Prime Lending Rate(BPLR) in line with the Reserve Bank of India’s (RBI) directive to the effect . The base rate is the rate at which the actual lending rate is calculated. Each bank may decide its own base rate on the basis of cost of deposits, adjustments in respect of RBI’s mandatory cash requirements & profit margins, among others. It was proposed by the RBI to ensure that banks do not lend at rates below their cost or at a loss.

The BPLR was the interest rate that commercial banks charge their most credit-worthy customers. Banks are free to fix BPLR with their board approval. 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.

The RBI is hoping to increase transparency in lending, and improve the way changes in monetary policy are transmitted to the economy by making banks establish a rate that approximates what they’ll charge their top-rated customers. Riskier borrowers pay above this and the banks are not allowed to go below.

The idea is to avoid a repeat of the boom, when competition for business and easy liquidity meant 70% of outstanding bank loans were priced below the banks’ internal benchmarks by March 2009. At State Bank of India, the country’s largest lender by assets, that benchmark was 11.75% last year. The average yield on its loan book, meanwhile, was 9.66%. The global problem of ensuring banks do not take outsized risks is addressed in India by this initiative of the RBI.

The way the new system is expected to be more sensitive to policy changes. Till now, India’s oil marketing companies borrowed at rates as low as 5%. They will have to pay higher interests. They could start to look elsewhere for funds, with one potential outcome a bigger and more liquid corporate bond market. Smaller scale borrowers and individuals will benefit. This group often wound up paying hefty premiums to internal benchmarks, to compensate for the discounts given to big borrowers. The move may hit the existing home loan borrowers. But the impact on the existing home loans due to the base rate may be as low as plus or minus 25 basis points (bps, a hundred of which would amount to one per cent). The era of Teaser Rates, the rates below BPLR set by the banks wil end now, but the rupee loans to exporters engaged in four labour-intensive sectors—handicrafts, carpets, handlooms and SMEs will be at exempted from the base rate system, but the lending rate to these sectors cannot fall below 7%.

Overall, it is considered as a critical step for the Indian economy, when it comes to long-term stability – even if it casts a short-term shadow over credit growth.

Base rates(PA) of various banks are given below.

Banks Base Rate (PA)

State Bank of India 7.5%
Punjab National Bank 8%
Bank of Baroda 8%
Union Bank 8%
Central Bank of India 8%
Bank of Rajasthan 8%
Indian Bank 8%
Uco Bank 8%
IDBI Bank 8%
Indian Bank 8%
Dhanlaxmi Bank 7%
Federal Bank 7.75%
State Bank of Mysore 7.75%
Corporation Bank 7.75%
Karur Vysya Bank 8.5%
Canara Bank 8%
Indian Overseas Bank 8.25%

Leave a Reply

Your email address will not be published. Required fields are marked *