RBI defers implementation of base rate to 1 July

06 Mar 2010

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Loans against fixed deposits, loans given by a bank to its own employees, as well as restructured loans, where borrowers get more time and pay lower rates to avert defaults, can be given at interest rates that are below the base rate, the new benchmark rate for pricing loans.

The RBI has allowed relaxation in certain terms for loans against fixed deposits, loans given by a bank to its own employees and unstructured loans. Borrowers will now get more time and pay lower rates to avert defaults and also these can be given at interest rates that are below the base rate, the new benchmark rate for pricing loans.

Along with this the central bank has also deferred the date for implementation of the base rate by banks to 1 July, which it had earlier set for 1 April, a deadline that most banks had found difficult to meet.

However, the regulator has ruled out any lending to corporates at below the base rate. The decision was taken in Mumbai on Friday following a meeting between RBI deputy governors and CEOs of select commercial banks in which the RBI also agreed to give more flexibility in calculation of base rate.

For banks, the base rate would be the minimum cost at which they can lend while the risk premium on a loan would be the mark up over the base rate. The base rate, which will be introduced to replace the prime lending rate (PLR), is aimed at enhancing transparency in loan pricing.

Currently around 70 per cent of the loans are offered below PLR which ranges between 11.75 per cent to 12.25 per cent.

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