RBI likely to announce sunset clause for base rate migration

The Reserve Bank is likely to announce a sunset clause with a deadline of June 30, 2011, for all loans in the erstwhile benchmark prime lending rate (BPLR) system to help banks migrate to the new base rate model.

Banks had approached the Reserve Bank for such a clause for all BPLR-linked loans, which would have otherwise forced them to administer two types of benchmarks, base rate and BPLR, for many years if a borrower refused to switch to the base rate.

Asked whether the RBI has agreed to the sunset clause, SBI chairman OP Bhatt told reporters here that the central bank is currently examining the implementation of the clause with a one-year deadline, and is likely to make an announcement in this regard soon.

"Yes, they are going to announce (the decision on sunset clause)...The RBI is currently examining the clause (with a deadline of) one year...That is by June 30 next year," Bhatt said after the customary pre-policy meeting with top RBI officials, ahead of the central bank's quarterly policy review on July 27.
    
Banks moved to the base rate regime from July 1, following the recommendations of an RBI-appointed panel to replace the erstwhile BPLR with the new model to improve transparency in lending.
    
Earlier, banks used to cross-subsidise top-rated corporate loans with those given to the common man.

With the implementation of the system, all new loans will be linked to base rates. Existing loans will be shifted to the base rate model upon reaching maturity, or if the customer opts for the change.
     
However, bankers are worried that long-maturity loans, such as the ones for infrastructure, will continue in the BPLR regime if the customer refuses to switch.
    
Most state-owned banks, including top lenders SBI and ICICI Bank, have fixed their base rates between 7.5 and 8 per cent while some private and foreign sector banks have kept it at even lower levels to woo potential corporate clients.
    
Bankers met Reserve Bank Deputy Governor Subir Gokarn today, ahead of the quarterly review later this month, to discuss issues like credit growth, liquidity situation and base rate implementation.
    
The RBI is widely expected to hike its overnight lending and borrowing rates (repo, reverse repo) by at least 0.25 per cent during its policy review to check double-digit inflation.