RBI puts off rollout of base rate to July 1

Giving in to a request from bankers, the Reserve Bank of India (RBI) on Friday agreed to extend the deadline for implementing the base rate regime from April 1 to July 1, 2010. ?It has been decided that the base rate system would be introduced from July 1, 2010. A final circular on this will be issued shortly taking into account comments received from various stakeholders and the discussions with banks,” said RBI on Friday.

The base rate will replace the current benchmark prime lending rate (BPLR).

Deputy governor Shyamala Gopinath said RBI had decided to give bankers some more time since they had asked for it.

?BPLR will continue along with the base rate until the transition is complete. The base rate will be applicable to new borrowers, and existing customers will continue to be governed by BPLR beyond July until their loan is due for renewal,? observed OP Bhatt, chairman of State Bank of India.

Bhatt said RBI still has to take a view on the classification of export loans and he expects the central bank to issue norms soon.

Speaking to FE, MV Nair, chairman & managing director, Union Bank of India, said, ?RBI has agreed to exclude staff loans, loans against fixed deposits and differential interest rate from the purview of base rate.”.

However, the central bank hasn’t agreed to exclude the purview of the base rate regime from discounted festival and agricultural loans, he said.

?We will give a choice to our customers either to go for the base rate with immediate effect after July 1 or will shift their loans to the new system whenever these loans come for renewal before us. Though every bank will calculate their own base rate, on an average, it should be in the range of 8-8.5%,?? Nair said.

Commenting on proposed base rate regime, YM Deosthalee, chief financial officer, L&T, said: ?I don?t think banks will be giving loans to corporate sector lower than 11-12%, even after the base rate system comes into effect.?

The central bank had announced on February 10 that banks should switch over to the new system for calculating their lending rates. The new system will replace the BPLR system with the base rate methodology for ensuring transparency, it said. However bankers had sought time till July to prepare for migration to the new model as they felt the April deadline gave them very little time to complete the huge task of gathering segment-wise data required to arrive at their respective base rates. The central bank has also agreed to earmark segments where the base rate wouldn?t be applicable.

A team of bankers, including SBI chief Bhatt, Union Bank chief Nair, MD Malaya, CMD of Bank of Baroda, Alok Misra, CMD of Bank of India, TY Prabhu, CMD of Oriental Bank of Commerce, Basant Seth, CMD of Syndicate Bank had met RBI officials comprising four deputy governors?Usha Thorat, Shymala Gopinath, KC Chakraberty and Subir Gokran?to finalise the terms and conditions for implementing the base rate system.

P Sitaram, chief financial officer, IDBI Bank, said customers need to be educated before getting their consent for accepting the new system.

?Since 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,? RBI said in its draft guidelines on base rate.

Accordingly, the current requirement that BPLR will be the ceiling rate for loans up to Rs 2 lakh will stand withdrawn, the central bank said. The BPLR system had been drawing flak from various quarters as banks have been lending to highly rated corporates below their benchmark rate, making the system irrelevant.

According to 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 (after July 1) 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,” RBI said.

?It is expected that deregulation of lending rates will increase the credit flow to small borrowers at reasonable rate. Thus, direct bank finance will provide effective competition to other forms of high cost credit,? it said.