MIGRATION TO BASE RATE LOWER THAN EXPECTED

The base rate system, the cost-plus loan pricing regime introduced last year, has improved monetary policy transmission. However, migration of loans to the new regime from the earlier benchmark prime lending rate (BPLR) one has been lower than projected, say bankers.

They say the conversion has not happened in the case of housing loans and term loans. “For term loans, which typically have a tenure of five to seven years, most clients have not shifted to the base rate regime, as the interest rates are similar,” said B A Prabhakar, executive director of Bank of India. BoI has seen 25 per cent of its BPLR customers converting to the new regime.

IDBI Bank has seen only 16-18 per cent of loans shifting to the base rate regime. “The only loans that have shifted came up for renewal in the past year. The BPLR system continues for corporate term loans and home loans. We had given them the option but clients saw no big advantage in changing over, as the effective rate is the same. Some expense is incurred when amendments are made to the loan agreement while shifting but that is not charged to the customer,” said P Sitaram, chief financial officer.

Central Bank of India said working capital loans were getting shifted to the base rate system as they came for renewal. “They come up for renewal in a year and automatically get linked to the base rate system. In case of term loans, we had given them an option to shift to base rate and very few opted to stay with BPLR,” said H K Vesuna, general manager.

Banks had requested the regulator for a sunset clause for BPLR-linked loans, which was not entertained. According to Reserve Bank of India sources, the legal implications have deterred the central bank in doing so.

Banks were given June 30 as the deadline to decide on the method for calculating the base rate. “Now that the base rate mechanism has stabilised, there is no need to extend the deadline,” said a source.

RBI also acknowledges that the transmission mechanism has improved, though it is not robust. Banks have responded to RBI's rate rises by increasing their lending rate.

“Monetary transmission has been quite strong, with 45 scheduled commercial banks raising their base rates 25-100 basis points after the May 3 policy statement. Cumulatively, 47 banks raised their base rates by 150-300 basis points during July 2010-May 2011,” the central bank had said during its mid-quarter policy review last week.

SOURCE: http://www.business-standard.com/india/news/migration-to-base-rate-lower-than-expected/440145/