Banks unlikely to fix base rates at very low level: Experts

Banks are unlikely to fix their base rate at a very low level even though the Reserve Bank of India has given them the freedom to decide the methodology to arrive at their respective base rates, experts today said.
       
"I do not think anyone can fix the base rate so low as the Reserve Bank has clearly said that the transparency aspect needs to be maintained in the lending process," Care Rating Agency Managing Director and CEO, DR Dogra told PTI here.
       
According to Dogra, the likely base rate in the banking industry is likely to be in the range of 7 per cent to 9 per cent.
       
To enhance transparency in lending, the Reserve Bank on Friday issued guidelines to replace the existing benchmark prime lending regime with base rate from July 1, below which no bank can lend. RBI also gave time till December for banks to change and fine tune the method of calculating the new rate.
       
Base rate of banks assumes significance as so far, banks used to lend much lower below their BPLR to their top rated corporate clients and to common customers at a much higher price, which invited the Reserve Bank's attention to the issue.
       
Given that banks are free to choose the methodology, which means they can benchmark the base rate even to a 14-days or 45-days deposit (means around 4 per cent interest), there is a possibility that some banks may fix their base rate at very level, according to banking sources.

Although banks are free to take a call on the methodology of calculating the base rate but they have to arrive at the base rate at a transparent way. The base rate calculation will take into account factors like cost of deposits and profit margins among other factors.
       
Indian Banks' Association Chairman and Union Bank of India Chief, M V Nair had earlier said that the base rate of banks in the industry is likely to be in the range of 8.5-9.5 per cent, although the rate may vary from bank to bank.
       
State-run Oriental Bank of Commerce's Chairman and Managing Director, T Y Prabhu also said that a very low base rate will result in transparency and discriminatory issues in the pricing of loans in the banking industry.
       
"If you keep the base rate so low then how do you price the loans for common customers. If you are having a base rate of 4 per cent and if you price it(loans to individuals) at a very high level, then that means something is wrong," Prabhu said.
       
The proposed base rate, which will replace the current system of benchmark prime lending rate, is expected to improve transparency in the way banks lend.
       
The BPLR system has been drawing flak from various quarters since banks have been lending to highly-rated corporates below their benchmark rate, making the system irrelevant and opaque.