The Reserve Bank of India (RBI) on Monday said some apprehension that the forthcoming base rate system from July 1 may raise the effective cost of borrowings for the corporates is unlikely to happen.
?Corporates have access to multiple sources of funds and hence the effective borrowing rates will be determined by market competition,?? said Deepak Mohanty, executive director, RBI, while addressing Bankers? Club in Kolkata.
Mohanty said the new system gives the freedom to banks to choose other market related benchmarks, besides their base rates for pricing floating rate products.
?This could promote development of market benchmarks. It could also deepen the money market to facilitate short-term liquidity management by banks,?? he noted.
Mohanty said that base rate system will promote financial inclusion with greater credit flow to agriculture and small business. This, together with other specific measures taken by RBI for financial inclusion, will draw borrowers away from the informal financial sector to the formal financial sector and thus, facilitate credit penetration.
The introduction of the base rate system along side removal of interest rate ceiling on small loans and freeing of rupee export credit interest rate is expected to enhance the allocative efficiency of the financial intermediation process by banks, he said.
The base rates of banks will mirror their relative efficiency and cost structure.