Base rate unlikely to raise lending rates for corporates: RBI

The Reserve Bank of India (RBI) has said that introduction of the new regime of base rate -- a benchmark rate below which banks will not be allowed to lend money -- is unlikely to raise the effective lending rates for corporates.

"There is some apprehension that the base rate system may raise the effective cost of borrowings. This is unlikely because corporates have access to multiple sources of funds and hence the effective borrowing rates will be determined by market competition," RBI Executive Director Deepak Mohanty said at Bankers’ Club Kolkata.

The statement is uploaded on the RBI's website today.

Yesterday, industry body Ficci's survey said that raising money from banks will be costlier for big firms after the introduction of the new regime of base rate, which would come into effect from July replacing benchmark prime lending rate.

Since many rates are used to be given to highly rated corporates below prime lending rate, there is lack of transparency in interest rate regime in the country, prompting RBI to ask banks to move towards base rate system.

Under the current structure, each bank declares the benchmark Prime Lending Rate (PLR) and advances credit to its customers at rates above or below the benchmark rate. The actual rate depends upon the credibility of the borrower.

He added that the new system would give complete freedom to banks in their loan pricing decisions while ensuring transparency.

"Banks have unlimited access to public deposits and privileged access to the liquidity facility of the Reserve Bank. Hence, there is a greater need for transparency and responsible lending practices for public purposes," he said.

It is expected that the base rate system will show greater flexibility and strengthen both the interest rate and credit channels of monetary transmission, Mohanty said.