RBI postpones base rate implementation

Heeding to the request from banks, the Reserve Bank of India (RBI) today postponed the implementation of the proposed base rate mechanism by three months.

After a meeting with bank chiefs, RBI said the system would come into effect from July 1. Bankers, however, said there was still confusion on calculating the cost of deposits, a key element for working out the rate.

According to the formula proposed by RBI, the base rate will be calculated on banks’ cost of deposits, adjustment for the negative carry in respect of the cash reserve ratio and the statutory liquidity ratio, overhead costs and a profit margin.

A senior executive said RBI had indicated that banks were free to adopt the methodology to calculate their cost of funds. “It can be based on the 14-day cost of deposits, or six months, or even incremental cost of funds. But all that RBI wants is consistency. Whatever be the base, you have to stick to it,” said a banker present at the meeting.

The other area where banks will have freedom is the profit margin. “It can be the net interest margin, the return on assets, the return on equity, or any other measure. But once again, it has to be consistent,” a banker said.

“So, the base rate can vary from one bank to another by a huge margin,” said another executive.

“The base rate system, to replace the present benchmark prime lending rate (BPLR) mechanism, was suggested to bring more transparency. But so far, it has only compounded the confusion,” said a banker. RBI is expected to clarify a lot of issues in the final guidelines, which are expected soon.

“Implementation per se is not a problem. We wanted more time because the system has to be geared up,” said MV Nair, chairman and managing director of Union Bank of India.

However, RBI reminded banks that no lending would be allowed below the base rate, except in three categories, bankers said. These categories are loans against fixed deposits, schemes targeted at certain low-income segments and loans to bank employees. RBI is yet to decide whether export credit should be kept within the purview of the regime.

The meeting was attended by all four deputy governors of RBI and top bankers, including State Bank of India Chairman OP Bhatt, Bank of Baroda Chairman and Managing Director MD Mallya, IDBI Bank Chairman and Managing Director Yogesh Agarwal, and Union Bank’s Nair.

Reuters reports: The benchmark prime lending rate and the base rate would both continue until complete implementation of the new system, State Bank of India Chairman OP Bhatt said. “The base rate is for new borrowers and we will have to take care of old borrowers also,” said Bhatt.