Base rate to bring in transparency in loan pricing: RBI

The Reserve Bank of India (RBI) today said the proposed new base rate, which will replace the benchmark prime lending rate (PLR) from July 1, will bring in more transparency to the loan pricing process, benefiting the end-customers.

"The base rate will be the new reference rate for determining lending rates for banks. This would bring in more transparency to loan pricing for customers," RBI Executive Director Deepak Mohanty told reporters on the sidelines of a function here today.

"This will also make the system more flexible. Today a common person doesn’t know how the loan pricing is happening. As per the new system, the banks have to display the rates in the public domain," he said.

After the implementation of the new lending system, existing borrowers will continue to pay at the existing rate but they also will have the choice to switch over to new system on renewal, while the base rate will apply to new customers from the start.

The RBI had last week deferred the implementation of the base rate system by three months to July 1. The apex bank in early February had issued draft guidelines to banks to switch to benchmark lending rate, which will be applicable to all customers. The RBI took this step following banks refusal to extend the low interest regime to existing customers.

Under the base rate system, which will replace the current benchmark prime lending rate, banks would not be allowed to give loans below the base rate to anyone. The PLR has been much abused as banks provide loans to high rated corporates below this rate, reflecting lack of transparency in the lending rates and the lending process.