IBA suggests base lending rate

It will serve as minimum lending level.

Reason

BPLR does not fully and accurately reflect the changes in effective lending rates as nearly two-
thirds of banks’ lending takes place at sub-BPLR rates.

Our Bureau

Mumbai, Oct. 8 The Indian Banks’ Association, in its recommendations to the Working Group
on BPLR, has pitched for replacing the Benchmark Prime Lending Rate (BPLR) with a base rate.

According to the IBA Deputy Chief Executive, Mr K. Unnikrishnan, the base rate will act as the
minimum lending rate for disbursing loans.

If the RBI accepts the IBA’s recommendation, then banks’ will not be able to lend below the
base rate as it will not be viable, said Mr Unnikrishnan on the sidelines of the IBA banking
technology seminar.

Varying rates

Banks will need to add their operational costs to the base rate for lending. So the rates could vary
across segments. For example, retail and SME segment lending have comparatively higher
operational costs compared to the corporate segment. The base rate is expected to vary from
bank to bank.

Currently, banks’ are arriving at the BPLR by adding up the cost of funds, risk premium, capital
charge and a profit mark up. But once the base rate methodology is embraced, then banks with
large current account and savings bank account (CASA) will be at an advantage, said a senior
banker.

The system of BPLR, according to the RBI, has evolved in such a manner that it has lost its
relevance as a meaningful reference rate as bulk of the loans are advanced below BPLR.

Non-transparent

Further, this impedes the smooth transmission of monetary signals and makes the loan pricing
system non-transparent. Hence, the RBI, in June 2009, set up a committee to review the BPLR
system and suggest changes to make credit pricing more transparent, the policy proposed
constitution of a working group on BPLR.

The RBI is of the view that movement in the BPLRs does not fully and accurately reflect the
changes in effective lending rates as nearly two-thirds of banks’ lending takes place at sub-BPLR
rates.
The RBI’s discussions with banks reveal ample liquidity in the system and the subdued demand
for bank credit have increased the competitive pressure on them to lend at sub-BPLR rates.

Rough estimates show that the effective average lending rate for the scheduled commercial
banks has declined from 12.3 per cent in March 2008 to 11.1 per cent by March 2009. In effect,
the BPLRs of banks have turned out to be the maximum lending rates in most cases, distorting
their information content.

The committee is expected to submit its report on October 16.

The draft has been prepared and is being fine-tuned, Mr Unnikrishnan said.