RBI panel suggests new base lending rate system for banks
20 Oct 2009
A working group set up by the Reserve bank of India (RBI) has suggested the replacement of the current Benchmark Prime Lending Rate (BPLR) system that commercial banks in the country follow today with a new base rate, which would better reflect the lowest cost at which a bank can lend.
The proposed Base Rate will include all those cost elements, which can be clearly identified and are common across borrowers, the RBI said in a release.
The working group headed by Deepak Mohanty has suggested that the Base Rate should include: the card interest rate on retail deposits (deposits below Rs15 lakh) with one year maturity (adjusted for current account and savings account deposits); adjustment for the negative carry in respect of cash reserve ratio (CRR) and statutory liquidity ratio (SLR); unallocatable overhead cost for banks which would comprise a minimum set of overhead cost elements; and average return on net worth, the RBI release said.
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, it said.
In order to make the lending rates responsive to the RBI's policy rates, the working group has suggested that banks may review and announce their base rate at least once in a calendar quarter with the approval of their boards.
Banks should palace the Base Rate alongside actual minimum and maximum lending rates in public domain, the working group said in its report.
The proposed system of Base Rate is expected to eliminate the need for banks to lend below the BPLR as it represents the bare minimum rate below which it will not be viable for the banks to lend, the report noted.
