The RBI move to change the rules of banks’ base rate may not bring down lending rates immediately but would discourage arbitrary changes to borrower-specific spreads, said bankers.
RBI on Monday had said that banks must not increase spreads for a specific borrower unless the credit risk profile weakens or the loan tenure changes.
“Arbitrarily bankers are not supposed to change spreads over base rate. Just based on negotiations you cannot change the spreads but it has to be based on internal ratings,” said Ram Sangapure, executive director of Punjab National Bank.
It also said the banks can review their base rate calculation method every three years instead of the earlier-specified five. “I think this gives an opportunity to all the banks to have a relook at their base rate computation formula,” said Pradeep Kumar, State Bank of India MD.
The RBI had introduced the base rate system in 2010 and had said banks can calculate base rate by taking the average cost of funds or marginal cost of funds or by any other reasonable method.
In Monday’s notice, the central bank said, “Bank’s internal pricing policy must spell out the rationale for, and range of, the spread in the case of a given category of borrower, as also, the delegation of powers in respect of loan pricing. This rationale must be available for supervisory scrutiny, added RBI.
“Although the rules apply to all loans, I think it is targeted at retail loans, specifically in some cases where the tenure premium was not applied and loans were given at the base rate,” said a senior official at a private bank. In the past, many banks had shrunk spreads for a specific set of borrowers such as small and medium enterprises or home loan borrowers. Banks also charged lower spreads under festive home loan schemes to new customers.
Now, such changes will have to be up for scrutiny and must be approved by board as far as a change in tenure premium is concerned, said bankers. “Some banks were lending at the base rate. Now the tenure premium will have to be applied to these loans. Home loans cannot be given at base rate,” said Sangapure.