RBI should address grey areas in base rate mechanism: Assocham

Ahead of the monetary review, industry chamber Assocham today asked the RBI to make changes in the base rate mechanism to provide clarity on concessional loans given to industries for their restructuring.

In a statement, Assocham President Swati A Piramal also said that the base rate mechanism should cover non-banking finance companies (NBFCs), cooperative banks and regional rural banks (RRBs).

The base rate system, a new system for benchmarking lending rates, came into effect from July 1. The new mechanism, which replaced the prime lending rate system, sets the minimum lending rate for banks.

Most banks have set it at 7-8.5 per cent.
    
Piramal said that since base rate is a floor rate, it was unclear how loans given at concessional rates to industries that are being restructured or rehabilitated would be treated.
   
"It is well-known that the banking industry has re- structured a large number of viable units, where the funding of over-dues has been considered at substantially low rates of interest. The present base rate regime is totally silent, and would hit this portfolio and borrowers perceptively," she said.
    
The Assocham president also said that the present arrangement by banks for funding against letters of credit (LCs) and bill discounts would be severely affected by the base rate system as loans are given at substantially-reduced rate due to guaranteed payments.
    
The purpose of the base rate was to expedite the transmission of RBI's policy decisions on interest rates. Banks giving loans to highly-rated corporates at rates below prime lending levels used to result in the transmission getting affected.
    
Assocham said that freedom for banks to adjust base rates quarterly would also come in the way of smooth transmission of RBI decisions.
    
"Currently, the base rates are proposed to be reset every quarter, irrespective of time and tenure of monetary policy instances of RBI. There needs to be parity in timelines. There should be similar timelines in addition to banks' own policy for resetting the base rate. This will ensure monetary policy transmission without gap," the chamber said.
    
Piramal also said that the base rate mechanism leaves out government borrowings, which plays a crucial role in determining interest rates.
    
"The government is the biggest borrower in the market, and is often responsible for interest rate swings. The base rate does not appear to cover government borrowings in the sense that these borrowings are related to the prevailing coupon rates," she said.
     
The chamber also asked RBI to include lending by NBFCs, RRBs and co-operative banks in the base rate mechanism.