A Reserve Bank of India committee on Tuesday suggested that the Benchmark Prime Lending Rate (BPLR) system should be replaced with a base rate mechanism to introduce greater transparency in pricing of loans given by banks.
Under the proposed mechanism, all banks will be required to declare a base rate and charge interest rates over that depending on the credit profile of the borrower and repayment period.
At present, banks fix interest rates on loans with reference to BPLR. “The proposed base rate will include all those cost elements which can be clearly identified and are common across borrowers,” said the RBI working group report on BPLR.
The base rate, it added, would also serve as the reference benchmark rate for floating loan products.
The banks, however, will be permitted to lend money below the base rate for loans with a maturity of less than one year or for priority sector advances.
Under the current mechanism, many banks lend money below BPLR which does not make business sense. The RBI committee also suggested scrapping of the administered lending rates for small borrowers up to Rs. 2 lakh as the system has not helped in increasing the flow of credit to them.
In order to encourage exports, the working group said that rupee export credit should be kept at the base rate of individual banks.
At present, exports can get credit at 2.5 per cent below BPLR.
As regards the education loan, it suggested that they should be capped at 200 basis points above the average base rates of five largest banks.
At present, education loans up to Rs. 4 lakh are provided at BPLR and above Rs. 4 lakh at 100 basis points over the benchmark rate.
The working group further suggested that the proposed mechanism should apply to all new loans and those loans which come up for renewals.
As regards the existing borrowers, it added, they should be given the option to switch to the new system on terms and conditions mutually agreed between them and the bank.
Under the proposed mechanism, the report said, borrowers will be charged base rate plus the borrower-specific charges that would include operating cost, credit risk premium and tenure premium.
To make the whole process more transparent, it suggested that banks should be asked to announce base rate every quarter with the approval of their respective boards along with minimum and maximum lending rates.
The group further suggested that sub-base rate lending should be capped at 15 per cent of incremental lending during a year for priority and non-priority sectors. Such advances to the non-priority sector, it added, should not exceed five per cent.
It has also suggested that only four categories of loans should be kept out of the purview of the base rate mechanism.