Base rate to replace BPLR

The Reserve Bank of India (RBI) committee on reviewing the benchmark prime lending rate (BPLR) has recommended that the nomenclature be scrapped and a new benchmark rate — known as base rate — should replace it.

The base rate would be linked to one-year term deposit rate and also factor in the negative carry of cash reserve ratio (CRR) and statutory liquidity ratio (SLR), a source involved with the discussions said. Banks have for long demanded that they should be paid interest on the funds set aside to meet CRR requirements. After factoring in costs incurred while sanctioning a loan, the proposed base rate could be as low as 6-7 per cent in the current interest rate scenario, sources privy to the committee’s discussions said.

At present, bank BPLRs — which factor in the cost of funds, administrative costs and a margin over it — range between 11 per cent and 16 per cent.

With the base rate being low, the expectation is that sub-BPLR lending, which accounted for three quarters of the overall bank loan flow, would come to an end. “However, there may be some sub-base lending due to excess liquidity in the system, but that may have to contained under some specified percentage,” a banker said.

Sources indicated that the new system could be in place by early 2010.

The committee, which is close to finalising its report, has also recommended that there should not be separate benchmark rates for retail and corporate sector. The move comes despite a section of bankers arguing for multiple base rates. The committee was set up to bring about transparency in fixing benchmark rates.

“Once the guidelines come, there will be no BPLR. All banks will have to follow uniform guidelines for calculating the base rate. It will have to be publicised on their website,” a banking source said.

The committee which was scheduled to submit its report today has received another extension and would now submit the recommendations by October 16, RBI said today. However, members of the committee told Business Standard that the panel headed by RBI Executive Director Deepak Mohanty had finalised its recommendations during a meeting held yesterday and only the drafting was left.