Base rate norms finally eased
By Neelima Shankar
Apr 12, 2010
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Reserve Bank of India has finally eased norms for fixing the base rate. The banks will have to adopt a lower benchmark as per the new norms.

The final guidelines state that "Banks may choose any benchmark to arrive at the base rate for a specific tenor that may be disclosed transparently."

RBI has clearly said: "Banks are free to use any other methodology, as considered appropriate, provided it is consistent and is made available for supervisory review/scrutiny, as and when required."

"Banks will tend to fix their base rates at the lower end of the rate spectrum in order to be able to tap all forms of rate segments," said Paul Abraham, chief operating officer, IndusInd Bank.

The banks were in fear earlier that owing to the higher rates of interest set as per the base rate corporates might move towards commercial papers for receiving funds. But the flexibility in norms has now relieved banks from this threat.

As per the earlier norms, banks' base rate would have been somewhere around 8.5 - 9%. This was a major reason behind the prolonged feud between RBI and the commercial banks.

But the new guidelines may bring an end to this tiff. "We believe the banks would set base rates in the lower range of 5% to 7% to ensure minimal disintermediation to other forms of credit by top-rated corporates," said Nilesh Parikh, Kunal Shah and Vivek Verma of Edelweiss Securities.

"Lending rates for Indian banks are not currently linked to deposit rates, which RBI has been trying to do. With hike in CRR and deposit rates, the impact on lending rates will now be immediately visible," they said.
"The norms give clear and transparent mechanism in pricing any loan which will stop unhealthy lending in the industry," said MD Mallya, chairman and managing director, Bank of Baroda.


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