Sunset clause for base rate soon

Most banks have had approached the apex bank for such a clause for all BPLR-linked loans, in the absence of which they would have to forcibly administer two types of benchmarks—base rate and BPLR— for many years in case a borrower refuses to switch to the base rate.

SBI Chairman OP Bhatt told reporters that RBI is currently examining the implementation of the clause with one-year deadline and make an announcement soon.  “Yes, they (RBI) are going to announce the decision (on sunset clause)...it is currently examining the clause with a deadline of one year...that is by June 30 next year,” he said after coming out of customary pre-policy meeting with top apex bank officials including RBI Deputy Governor Subir Gokarn here prior to RBI’s quarterly  It may be noted commercial banks switched over to the base rate regime starting from July 1 following the recommendations of an RBI-appointed panel to replace the erstwhile BPLR with the new model to improve transparency in lending.  They used to cross subsidise top-rated corporate loans with those given to the common man.

With the implementation of base rate system, all new loans will be linked to base rates. Existing loans will be shifted to the base rate model if the customer opts for the change or upon reaching maturity. Yet, bankers are concerned that long-maturity loans like infrastructure will continue in the BPLR regime if the customer refuses to switch.
Most state-owned banks, including SBI and ICICI Bank have fixed their base rates between 7.5-8 per cent while some other private and foreign sector banks have kept it even below to woo potential corporate clients.

Market expectations
Meanwhile, bankers in their meeting with RBI officials this day discussed issues like credit growth, liquidity situation and base rate implementation amongst other issues. Speculation is rife that RBI will hike its overnight lending and borrowing rates (repo, reverse repo) by at least 0.25 per cent at its policy review to check the double-digit inflation. Market initially hoped that RBI would raise by 50 basis points at the review meet directly without resorting any cut prior to it, but RBI surprised the market with an hike of 25 basis points on the very next day after the base rate came into effect this month.

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