Base rate regime to benefit small borrowers: CRISIL

The new base rate regime that kicked in from Thursday is expected to benefit small borrowers, says a latest report released by CRISIL Research.

"CRISIL Research expects the transition from the benchmark prime lending rate (BPLR) to the base rate system from July 1, 2010 to increase transparency in lending rates and help small borrowers negotiate better rates with banks," says the report.

Since the new system would be transparent and the base rate would be publicly available, SMEs with healthy credit profiles would be able to negotiate for better rates with banks, it goes on to add.

It further adds that the greater transparency and increased competition would result in average yield on banks’ advances declining by 10-15 basis points (bps) over the next two years.

The final interest rate charged to borrowers, under the base rate regime, would be a function of the base rate plus borrower-specific charges, which would include product specific operating costs, credit risk and loan tenure, explains the report.

According to the research entity, the new regime would see an increased credit flow to small borrowers also because of the fact that the earlier stipulation of BPLR as the ceiling rate for loans up to Rs 2
lakh would be withdrawn.

"Deregulation of the lending rate is expected to increase the credit flow to small borrowers. The interest rate could be higher than BPLR but is expected to be lower than other forms of high cost credit (eg money lenders)," it says.