The base lending rates for banks will take effect on July 1 as a better and more transparent successor to the benchmark prime lending rates, the Reserve Bank of India Executive Director Deepak Mohanty said on Wednesday.
Addressing a function organised by the Reserve Bank Staff College as part of the RBI's platinum jubilee celebrations, Mr. Mohanty said the central bank had issued draft guidelines and held discussions with bankers on base rate norms.
“We have left the pricing decision to the banks. It is the competition in the market that should drive the pricing,” he said.
The RBI move comes in the wake of the Benchmark Prime Lending Rate having lost its transparency and turned into an overloaded entity with so many factors linked to it. Apart from providing greater transparency, the new base rate norms were also expected to get banks to pass on the benefits of interest rate cuts to consumers, something that had been the restricted privilege of corporate clientele.
“The base rate is an improvement though not a comprehensive solution to the complex challenges in the pricing of loans,” Mr. Mohanty said. Base rates would also be better synchronised with monetary policy, he said.
Mr. Mohanty later told presspersons that while the base rate would be the benchmark for new customers, existing customers would have the option of status quo or switching to the base rate regime.
“There is room for negotiation between the bank and the borrower,” he said.
On the RBI-spearheaded financial inclusion drive, Mr. Mohanty said the objective was that by 2011, any habitat should have access to a banking facility. The RBI is not merely looking at dormant accounts but wants rural bank accounts to be operational. Financial literacy is also an area of emphasis for the central bank.
“Banks have been told to explore communication technology options and work out a plan for facilitating access to bank transactions,” Mr. Mohanty said. The RBI had already assessed “the ground situation” and established demonstrably successful pilots in villages in all States. According to Mr. Mohanty, India's monetary policy of an eclectic nature and targeted multiple objectives such as price stability, growth and financial stability. The central bank's cautious approach had generally worked well for India in terms of higher financial integration with the global economy even though trade as a ratio of gross domestic product (GDP) was at a low base. Mr. Mohanty felt that it should be possible to reach the inflation milestone of about 3-3.5 per cent, which was critical for being better integrated with the global economy. Over the long haul of about six decades, India had remained a moderate inflation country, he said.
Mr. Mohanty also presented prizes to the winners of a University-level debate contest on the topic “Should our monetary policy focus only on price stability.”