Banks seek flexibility for switching to base rate system
By Vaibhav Aggarwal
Mar 5, 2010
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Many banks have arrived at a combined decision to approach the RBI regarding the implementation of the base rate system of loan pricing.

The CEOs of top banks of India will meet RBI Deputy Governor Subir Gokarn to postpone the implementation of base rate system in the banking system from 1st April 2010.

The banks want some flexibility in pricing of short term loans too. Further many bankers commented that they would seek permission from the RBI to keep certain products like loans against fixed deposits and to employees outside the conventional loan pricing method adopted as per the base rate system.

The RBI, through its new directive has put a ban on lending below base rate as used to be the case with sub BPLR lending.

Base rate will be calculated taking into account the cost of deposits, profit margin, cost of adjustment due to negative carry on CRR and SLR and cost of unallocatable overhead costs.

Most banks have estimated their base rate to be around 8.5% to 9% as per the given standards of calculation. The banks fear of having to lose the market to mutual funds and other NBFCs.

Till now, as per the BPLR system of lending, PLR of most banks is in the range of 11.75-12.25%. 70% of loans are given below PLR. Bankers said surplus liquidity in the system and lack of demand for loan forced them to opt for sub BPLR lending.

However, the country's largest lender, SBI has estimated its base rate to be around 8 %.

The bankers have sought to seek permission from the RBI as to defer the base rate implementation till July 2010.

The banks also seek clarity over calculation of cost of deposits. The first draft by RBI said that one-year deposit rate should be taken into account to calculate the cost, while the second draft simply mentioned cost of deposits - thereby giving each bank the option to take average cost of deposits, one-year cost or the incremental cost. This may lead to inconsistent calculation of cost of deposits.


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