Bankers' thumbs-up to 'base rate' plan

Bankers' thumbs-up to 'base rate' plan

Expected to bring greater transparency in lendings from banks

“I think it is a move in the right direction. We need some benchmark that calculates the risk element to improve transparency,” HDFC Chairman Deepak Parekh told PTI here.

At present, banks charge rates that are sometimes 2 to 3 per cent below their prime lending rate (PLR).

“We need to have a spread above the PLR. Having a base rate to replace the PLR will, therefore, be a right step,” Parekh added.

A Reserve Bank committee suggested that the BPLR system be replaced with a base rate mechanism. Under which, all banks would be required to declare a base rate and charge interest rates over that depending upon the credit profile of the borrower and repayment period. “I think it’s a good construct to distinguish between the base rate and the lending rate. It is a more transparent process and will check the extent of lending below the PLR rate,” Citibank Chief Financial Officer Abhijit Sen said.

According to the RBI working group report, the base rate would include all those cost elements which can be clearly identified and are common across borrowers. Besides, it would also serve as the reference benchmark rate for floating loan products.

IDBI Bank Chairman and Managing Director Yogesh Agarwal described the proposal as a “good move” and said “the base rate system would completely eliminate sub-PLR lendings”. The RBI working group has also recommended that the overall sub-base rate lending during a financial year should not exceed 15 per cent of their incremental lending. Agarwal opined that this 15 per cent limit would be sufficient. HDFC Bank Head, Treasury, Ashish Parthasarathy, said that the broad contours of the report were already known and that the base rate concept was a “welcome step in terms of transparency.”

He expected the base rate to be closer to the lower rate. “The base rate is likely to be on the lower side. Even if cost elements are added, the differential across banks in terms of the rate will be less. In other words, the base rate will be range-bound,” Parthasarathy said.

Industry body Assocham on Wednesday said the Reserve Bank’s panel suggestion to have base rate for lending would ensure transparency and efficiency in pricing loans, which the current system of BPLR does not provide.

“The current methodology adopted by banks for calculating benchmark prime lending rate (BPLR) is not transparent since it is never disclosed to the public,” it said in a statement.

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