One major question which still remains unanswered regarding the much debated base rate issue is whether priority sector will be exempt from base rate or not. The priority sector which constituted the major chunk of bank borrowers was allowed loans below the BPLR (sub BPLR lending).
The draft published by the Reserve Bank of India regarding the implementation of base rate system said that no lending would be allowed below the base rate threshold. If this lies implied for the priority sector too then a dent would appear in lending process to the private sector.
Speaking on this issue RR Nair, director and chief executive of LIC Housing Finance said, "If the lending rates according to the base rate system apply to priority sector as well, credit off take might suffer in the next fiscal too."
"This issue has been put up before RBI, and we are sure that it will be addressed. It is expected that RBI will make sure that priority-sector lending is not affected," he said.
The housing finance firms will be in great trouble if the base rate gets applicable to credit granted to them too.
As per the existing regulations domestic and foreign banks are required to extend 40% and 32 % of their advances to priority sector segments respectively. But to increase the tinge of transparency in the lending system, the Reserve Bank of India has decided to do away with the BPLR system of lending and come up with the base rate system of lending.
Regarding this issue the RBI had asked for feedback from bankers regarding the guidelines set as for the same.
After a meeting with the bankers the RBI pushed the implementation date of base rate system to July1, 2010 from the previously decided date of 1st April 2010.
It is expected by big analysts like JP Morgan analysts Seshadri Sen, Adarsh Parasrampuria and Sunil Garg that the base rate to be around 8.5%-8.75% for most of the large banks.
The rate will also be guided by factors like tenor premium, risk premium, creditworthiness and others of the kind.
It will affect the cost of borrowings of these firms. Currently the housing finance companies are able to get loans at rates ranging from 6-8.5 %.
However some firms do not feel the same. "Our source of money is diversified, so there won't be a major impact on the cost of borrowings," N Sivaraman, executive vice-president of L&T Finance said.
The report by JP Morgan has also said that base rate will be beneficial to banks and deleterious for borrowers in the short term. It could offset the expected 75 bps increase in savings bank deposits, when implemented.
"It is an interactive process. New rates decided by the banks will have to be seen first," said P Sitaram, chief financial officer, IDBI Bank.