GUIDELINES ON THE BASE RATE
RBI has released guidelines on the base rate which will replace the BPLR system with effect from April 1, 2010. Banks may determine their actual lending rates on loans and advances with reference to the Base Rate. Determination of the Base Rate will be based on:
- cost of deposits
- adjustment for the negative carry in respect of CRR and SLR
- unallocatable overhead cost for banks such as aggregate employee compensation relating to administrative functions
- profit margin
The actual lending rates charged to borrowers would be the Base Rate plus borrower-specific charges, which will include product-specific operating costs, credit risk premium and tenor premium.
All categories of loans should henceforth be priced only with reference to the Base Rate. The Base Rate system would be applicable for all new loans and for those old loans that come up for renewal.
Banks are not permitted to resort to any lending below the Base Rate. Accordingly, the current stipulation of BPLR as the ceiling rate for loans up to Rs. 2 lakh stands withdrawn. Interest rates on loans under the DRI scheme will continue to be fixed without reference to the Base Rate.
The Reserve Bank will separately announce the stipulation for export credit. Banks are required to exhibit the information on their Base Rate at all branches and also on their websites. Changes in the Base Rate should also be conveyed to the general public from time to time through appropriate channels. Banks are required to provide information on the actual minimum and maximum lending rates charged to major categories of borrowers to the Reserve Bank on a quarterly basis.
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