Banks explore options to lend below base rate

The main challenge is to convert existing term and home loans to the base rate.

Banks, which have managed to extract freedom from the Reserve Bank of India (RBI) in fixing base rates, have now started looking at ways to beat the ban on lending below the new benchmark.

One bank is looking at the possibility of charging a negative premium on loans below a certain term. For instance, if a bank uses the marginal cost of one-year deposits as the benchmark for fixing the base rate, a negative premium will be charged for all loans that have tenure of less than 12 months.

If the proposal, on which a clarification will be sought from the Reserve Bank of India, is approved, companies will be able to access loans for nine months at, say, 7 per cent, even if the base rate is 8 per cent.

“It will not be sub-base rate lending since the negative premium will be clearly mentioned and it will be the same for all borrowers,” a bank executive said adding that the issue would be discussed with other bankers and RBI.

Similarly, another bank is exploring the possibility of fixing more than one base rate to deal with different customers. So, a retail borrower will have a different base rate from a corporate borrower or a farmer.

“We cannot wish away having different rates for different borrowers. As long as it is done in a transparent way, and the borrowers are informed, RBI should not have a problem,” said a banker.

At present, lenders such as ICICI Bank have different benchmark prime lending rates for retail and other loans.

“Banks may choose any benchmark to arrive at the base rate for a specific tenor that may be disclosed transparently,” RBI had said in the base rate guidelines released on Friday. Base rate, which kicks in from July, will replace the existing system of benchmark prime lending rate, which is not seen as transparent.

Besides, RBI wants banks to adjust the base rate in line with monetary action and bank sub-base rate lending across most categories. At present, sub-BPLR loans accounts for nearly 75 per cent of the total lending done by banks.

At present, most of the lending to companies is around

7 per cent and a ban on lending below the base rate will make lending difficult.

Most banks currently have no clarity on how much the base rate will be. “We believe the banks would set base rates in the lower range (5-7 per cent) to ensure minimal disintermediation to other forms of credit by top-rated corporates,” Edelweiss Research said in a note.

Bankers expect rates to be much higher. For instance, the chairman of a large public sector bank said that even taking the one-year marginal cost of deposits as the key parameter, the base rate would be around 8 per cent.

According to a senior executive at a large public sector bank, based on the current average cost of funds, the base rate will be around 8.5-9 per cent. The main challenge is to convert existing term and home loans, which are of higher tenure, to the base rate because the customer has to agree to the conversion. Most bankers were surprised by the flexibility provided by RBI and are expected to decide their strategy over the next few weeks. Besides, they have the option to tweak the formula till December.