Base rate to replace BPLR from April

The Reserve Bank of India is going ahead with its plan to replace the current system of benchmark prime lending rate...

The Reserve Bank of India RBI is going ahead with its plan to replace the current system of benchmark prime lending rate BPLR from next fiscal with a base rate system,below which no banks can advance commercial loans.

The base rate system will replace the BPLR system with effect from April 1. 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 issued on Wednesday.

Accordingly,the current requirement that BPLR will be the ceiling rate for loans up to Rs 2 lakh will stand withdrawn,the central bank said.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.

As per 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 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, the 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.

Interest rates on loans under the DRI scheme will continue to be fixed without reference to the base rate. The Reserve Bank will separately announce the stipulation for export credit, the regulator said. Since transparency in the pricing of lending products has been a key objective,banks are required to exhibit the information on their base rate at all branches and also on their websites.

Story continues below this ad

The base rate system would be applicable for all new loans and for those old loans that come up for renewal. However,if the existing borrowers want to switch to the new system before the expiry of the existing contracts,in such cases the new/revised rate structure should be mutually agreed upon by the bank and the borrower,the RBI said.

Bankers generally welcomed the RBI move to replace BPLR. It is a welcome move and my bank is fully prepared to migrate to the new system of pricing of the loans from April,2010. In the absence of proper benchmark prime lending rate BPLR,lots of lending are underpriced. Its a biased market for borrowers. However,now the subprime lending will be repriced and it has to be in line with rating of the clients. This can also serve as the reference benchmark rate for floating rate products too. In a way,there will be transparency. It will go a long way in the proper pricing of the lending products and reasonable uniformity in terms of pricing of the lending products, said Bank of India executive director M Narendra.