Replace BPLR with base rate, RBI tells banks

 The base rate could serve as reference benchmark for floating rate loans, said the group, which reviewed the system of lending rates in India.  The report is on RBI website.

The proposed base rate will include all those cost elements which can be clearly identified and are common across borrowers.

The constituents of the base rate envisages the card interest rate on retail deposits (deposits below Rs 15 lakh) with one year maturity (adjusted for current account and savings account deposits) and adjustment for negative carry in respect of cash reserve ratio (CRR) and statutory liquidity ratio (SLR). 

That apart, the base rate also includes un-allocatable overhead cost for banks which would comprise a minimum set of overhead cost elements and average return on net worth.  In order to make the lending rates responsive to RBI’s policy rates, the panel has recommended that banks review and announce their base rate at least once in a calendar quarter with the approval of their boards and place it in public domain.

With the proposed system, there will not be a need for banks to lend below the base rate as it represents the bare minimum rate below which it will not be viable for banks to lend, it said. However, it also recognises certain situations when lending below the base rate may be required due to market conditions but as an exception only for very short-term periods. 

 Banks may give loans below one year at fixed or floating rates without reference to the base rate. However, in order to ensure that sub-base rate lending does not proliferate, the panel recommends that such sub-base rate lending in both priority and non-priority sectors in any financial year should not exceed 15 per cent of incremental lending during the financial year.

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