Lack of consensus led to RBI move on base rate

Members of the Reserve Bank of India (RBI) committee could not reach a consensus before issuing a set of directives on the base rate for banks last week. The committee was formed to provide guidelines for determining lending rates and bring in more transparency in the system.

According to sources the committee was divided on most issues. Not only did the public sector and private sector bank executives express divergent views, there was also a difference of opinion between the regulator and the bankers.

“RBI could not ensure consensus among state-owned and private sector banks. That was because private players and the public sector players have different objectives,” a source familiar with the deliberations of the base rate committee told Business Standard.

The differences among the members of the committee — headed by RBI Executive Director Deepak Mohanty comprising bankers and economists — forced the central bank to come up with a few directives instead of guidelines. RBI has left it entirely to banks to decide the methodology and calculation of the base rate.

The existing benchmark prime lending rate (BPLR) system to determine lending rates, differs widely for private and public sector players. For example, ICICI Bank’s benchmark rate is 15.75 per cent, while the SBI the rate is 11.75 per cent.

“The wide difference between private and public sector banks’ BPLR is because both follow different methods to arrive at the benchmark rate,” the source said.

However, in the discussion paper and the draft guidelines, RBI had attempted to define the parameters and the formula that should be used, but had to retract.

During the last phase of discussions, the regulator realised that it would be difficult for all the banks to follow a uniform set of norms. As a result, the regulator decided to let the banks determine the base rate.

While a section of bankers felt that historical cost of deposits should be taken as the cost parameter, others thought marginal cost would have been the more appropriate variable.

The method of calculating cost of funds emerged as the major bone of contention. In March, during a meeting with top RBI officials and bank chairmen, the central bank had hinted that it is going to leave it to the bankers to decide the parametres for calculating the cost of funds. However, when the bankers met informally at the behest of the Indian Banks’ Association they failed to reach an agreement.

Bankers also differed with RBI officials on the issue of best pricing to a highest rated company. “RBI wanted banks to lend at a minimum rate to the highest-rated companies. However, for a bank it is difficult to charge the same interest rate to all rated companies. Apart from the rating, many other parameters such as relationship with the customers and the loan amount go into determining the interest rate,” a source said.