Ahead of base rate rollout, banks seek legal check of loan papers

Fearing court cases after the implementation of the base rate regime next month, public sector banks have decided to go for a legal check on loan documents signed by them.

The issue was discussed in detail at a meeting of the country’s top bankers, convened by the State Bank of India on Friday. It was decided the lenders would seek independent legal opinion and, if need be, sign fresh documents, to ensure smooth implementation of the new regime.

Executives from Bank of Baroda, Bank of India, Union Bank of India and Central Bank of India attended the meeting. Public sector banks account for nearly three-fourths of the lending by Indian banks.

Under the new loan pricing mechanism that replaces the existing system of benchmark prime lending rates (BPLR), lenders are barred from offering loans below the base rate. The only exceptions are loans against deposits, those extended to employees or small-ticket targeted loans under the differential interest rate regime. In all other cases, loans have to be at a mark-up to the base rate. The scheme is being put in place as the BPLR system was seen to be less transparent, with banks offering three-quarters of loans below the benchmark rate.

At present, most agreements between lenders and borrowers, for retail as well as corporate loans, say the bank will provide the debt at a certain level below the BPLR (say, 150 or 200 basis points below). Interest rates on a large number of loans, especially those given to companies, come for reset every few months and banks will have to shift these to the base rate regime at that point of time.

On Friday, bankers said given the agreements that have been signed, there is a possibility that some borrowers may approach courts insisting the interest rate be below the base rate, as provided in the agreement. So, it was decided banks would seek legal opinion and decide the future course of action.

The other area of concern was preparedness of banks on information technology, since the systems were only programmed to deal with the BPLR regime. “It requires a massive change to core banking solutions, which has not been done so far. Given that we are just around three weeks away from rolling out base rate, being ready on the IT front is going to be a big challenge,” said a banker who attended the meeting.

The bankers also decided borrowers needed to be familiarised with the new regime, as over the years they have all got used to talking in terms of “BPLR minus” rates. “From now on, it will always be base rate plus x, even if that variable is zero,” said a bank executive.