Tags:
Journalism of Courage
Indias banks will finally migrate to a new system of setting lending rates today. The new base rate system replaces
the archaic benchmark prime lending rate system in a shift that promises to make bank lending not just more transparent but also more favourable to retail borrowers and small and medium enterprises. SBI,Indias largest bank by some distance,was the first to announce a new base rate of 7.5 per cent,which is now directly linked to the deposit rate. In comparison,SBIs benchmark prime lending rate,before the changeover,was 11.5 per cent. Perversely,and this was the problem with the older system,bluechip borrowers,mainly large corporate entities,got loans at rates well below the prime lending rate while smaller enterprises and retail borrowers got loans at rates much higher than the prime lending rate.
depends heavily on the commercial banking system,which gave them a raw deal until now.
Under the new base rate system,however,banks will not be able to charge exorbitant rates many percentage points above the needlessly high prime lending rate. With the base rate as the new benchmark,costs of borrowing for this group will come down while becoming more transparent. The base rate system will also trigger competition between banks to offer cheaper rates. The ability to offer cheaper rates will depend on the ability to mop up more deposits remember the base rate is linked to cost of deposits which falls as scale increases. That should help the cause of financial inclusion as well.
