Bankers give thumbs up to RBI`s proposed base lending rate

Last Updated: Tuesday, October 20, 2009 - 22:42

Mumbai: Bankers and financial sector experts on Tuesday welcomed the concept of a base rate to replace the existing benchmark prime lending rate (BPLR) on the ground
that it would usher in greater transparency in bank lendings.

"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 said to a news agency here.

At present, banks charge rates that are sometimes 2-3 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 today 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 percent of their (banks) incremental lending.

Agarwal opined that this 15 percent 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.

Bureau Report



First Published: Tuesday, October 20, 2009 - 22:42

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