It was unthinkable for China to do it. Yet, it did last week. Beijing scrapped the floor on lending rates. It let banks to decide on their lending rates. Some have hailed the move as ‘breakthrough’. It is obviously intended to help cut cost for enterprises in raising funds. Citing Chinese action, questions have been raised nearer home on the wisdom of continuing the Base Rate, the minimum rate at which banks can lend to anyone.
Introduced in 2010, the Base Rate replaced the Benchmark Prime Lending Rate (BPLR), which, according to the Reserve Bank of India, was less transparent. Since the banks, at times, had lent at rates below the BPLR, the RBI found it that much difficult to assess the transmission of its monetary policy. Though banks can fix their own base rates, they are told to make it public.
A perusal of the banking system reveals certain amount of convergence in base rates. Excepting a few cases, base rates hover around 10-10.50 per cent in most cases.
With the RBI adopting a blinkered-horse like approach to quell rupee volatility, liquidity in the system is continuously squeezed. Bond yields have, as a consequence, risen. These measures already are having repercussions on the cost of funds for borrowers.
“The Base Rate is definitely hurting the enterprise,’’ argues a top industry source. Is the convergence in base rates a coincidence? The BPLR might have been misused by banks. The Base Rate, however, takes away from banks the flexibility to price loans according to their risk perceptions. For banks with higher current account and savings account ratio, it should be possible for them to lend at least a portion of it at efficient rates based on risk perception. The Base Rate also does not confer any advantage to better-rated enterprises. Though many enterprises are allowed the external commercial borrowing window to access cheap overseas funds, the rupee swings have hurt their cause.
Affordability is the key for enterprises to access bank funds . “The Base Rate is doing more harm than good at the moment,’’ says an analyst.
Can India pick up a clue or two from the Chinese move to do away with floor rate for lending?
