RBI moots new base lending rate from Apr 1

The Reserve Bank of India (RBI) said on Wednesday it will introduce from April 1 a new base rate to price credit more transparently, replacing the existing benchmark prime lending rate (BPLR).

New loan pricing regime from April

The RBI said the base rate will be the new reference rate for determining lending rates.

"It is expected that deregulation of lending rates will increase the credit flow to small borrowers at a reasonable rate," the RBI said.

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"Thus, direct bank finance will provide effective competition to other forms of high cost credit," it said.

According to draft guidelines, the RBI has proposed that the actual lending rate charged to borrowers would be the base rate plus borrower-specific charges including product-specific operating cost, credit-risk premium and tenure premium said.

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Currently, banks offer loans to big corporates at around 8-9 percent, while the average BPLR is 11-12 percent.

The new base rate system will increase the lending rates to big corporates who earlier used their bargaining power to negotiate at sharply below the BPLR, said S.A. Bhat, chairman and managing director of state-run Indian Overseas Bank.

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"A back of the envelope calculation shows that the base rate will be at around 10-11 percent, " Bhat said.

"In that case, SME (small and medium enterprises) borrowers who got loans at higher rates will be able to reduce their cost of borrowing," he said.

SMEs are usually charged a higher lending rate of 14-16 percent.

NO LOANS AT BELOW BASE RATE

The central bank said no bank will be allowed to give loans below the base rate. It has withdrawn the current stipulation of BPLR as the ceiling rate for loans up to 200,000 rupees.

The base rate will be applicable for all new loans as well as for old loans that come for renewal. Existing borrowers who want to switch to the new system before the expiry of their contracts should agree on the revised rate structure with the banker, it said.

Cost of deposits, adjustment for negative carry in respect of cash reserve ratio and statutory liquidity ratio, unallocatable overhead cost and profit margin will be added for computing the base rate, the central bank said.

"The base rate could also serve as the reference benchmark rate for floating rate loan products, apart from the other external market benchmark rates," it said.

The RBI had mooted the change from BPLR in the annual monetary policy statement last April.

A working group had issued first draft norms in October.

The RBI has asked for feedback on these draft norms by Feb. 17. Details are on the RBI website (www.rbi.org.in).

(Editing by Rosemary Arackaparambil)