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RBI’s new base rate norm to usher in transparency

The country’s central bank has introduced a new reference rate for determining lending rates in a bid to bring in transparency into the system

The Reserve Bank of India (RBI) has done away with its benchmark prime lending rate (BPLR) system that regulated lending rates of commercial banks. In its place, the RBI has introduced a ‘base rate’, which is likely to come into effect from 1 April 2010. Under its new guidelines, RBI has stated that “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”.

“We believe that this is a positive move by the RBI as it brings in more transparency in the pricing at the same time replacing the inefficient PLR rates which were earlier used as the benchmark,” said Jyothi Kumar, analyst, KR Choksey Shares and Securities Pvt Ltd, in a note.

According to a circular issued by the apex bank, the base rate will be applicable to all new loans. For old loans that come up for renewal, borrowers will have the option to switch to the new system provided they agree with the terms the banks offer. Banks will have to calculate the base rate on the basis of the cost of deposits, adjustment for the negative carry in respect of cash reserve ratio and statutory liquidity ratio, overhead costs and a profit margin. With this system, the RBI hopes that it would usher in transparency in the pricing of lending products, something that was lacking under the BPLR system.

Speaking to Moneylife on the condition of anonymity, an official from Anand Rathi Financial Services Ltd said, “It will bring in more transparency. Right now, there is a lot of lending that happens below PLR, which the customer is not aware of. He does not know what rate is being offered to fellow customers. Therefore, there is no transparency in terms of what rates are being offered on a set of products. There is also confusion because many banks have different PLRs. The base rate is a rate, which the customer knows, will be the lowest rate that could be offered. Thus, it brings clarity in lending.”

Under the ‘base rate’ system, customers can be reasonably sure that they are not going to be under-cut on lending rates like before. The analyst explained, “Transparency rises from the fact that customers know that they are not going to be undercut. Certain customers get preferential rates, below the base rate. Now he knows that preferential rate will be the base rate at maximum. So right now he might be told that he is getting a preferential rate, but that might not be the case. Other customers might be getting at PLR-4%.”

This move of deregulating lending rates will also lead to competition among banks. This is so because the base rates will be known to everybody. For instance, when approaching ABC bank for a loan, a customer will say that XYZ bank is giving him a rate which is base rate plus 2%, and will demand a better rate if its base rate is lower than the ABC bank. Otherwise, he might as well go to XYZ bank. So banks will have to cut down on other costs of lending. It will make banks more competitive, transparent and better in the long-term perspective, said the analyst.
While banks are free to determine their actual lending rates on loans and advances with reference to the base rate, the calculation of the base rate shall include all those elements of the lending rates that are common across all categories of borrowers. Under the new draft rules, banks should calculate their base rate by including the cost of deposits, cost of maintaining the statutory liquidity ratio and cash reserve ratio, cost of running the bank, and profit margin, as per the RBI guidelines.

Meanwhile, according to a PTI report, bankers are believed to have turned down the RBI\'s suggestion to extend the cheaper home loans to existing customers saying that the move will impact their bottom lines, amid a debate over teaser rates.

Banks, led by State Bank of India, under special schemes offer home loans at lower interest (teaser) rates to new customers for the first few years of the credit period, which has kicked up a storm in the industry.

A month ago in January, the RBI had voiced concerns over \'teaser\' rates. Later, it said the cheaper rates should be extended to existing borrowers as well.

"The IBA has said that if banks offer lower rates to old customers as well, this will affect their earnings as it is not feasible for them to change their deposit rates accordingly to compensate this loss of interest arising from such a move," an official of the Indian Banks Association told PTI on condition of anonymity.

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    10 years ago

    Why Personal Loan Rates are not get impacted while the Rates are changed from the PLR to BaseRates..



    1 decade ago

    A very smart step taken by RBI ...I guess the bank are right to hold the teaser rate to a group of customers and not to all the old ones cos RBI has already cut down their earnings by bringing base rate and if they lessen their income on homloans it wont b fare

    Rivals agree Toyota recall is not a good sign for the industry

    Global carmakers said that they are not going to take advantage from the crisis faced by Japanese auto giant Toyota, which is recalling over eight million vehicles worldwide but agreed that it is not a good sign for the industry

    Global carmakers, including General Motors Co (GM), Ford Motor Co (Ford) and Honda Motor Co Ltd, on Thursday said that they are not going to take advantage from the crisis faced by Japanese auto giant Toyota, which is recalling over eight million vehicles worldwide but agreed it is not a good sign for the industry, reports PTI.

    Toyota is recalling the vehicles worldwide to fix faulty accelerator pedals and brakes.

    "Toyota's problems are not good for the industry. The industry perspective on the Toyota recall is that no one likes to see another competitor being put through that," GM's North American president Mark Reuss told reporters on the sidelines of the Chicago Auto Show. "We like to have a healthy industry and we would like to be able to compete on a level playing field," he added.

    Echoing GM's thoughts, Ford's president of the Americas Mark Fields said the company does not see Toyota's troubles as an opportunity to steal customers. "We have a lot of compassion for what Toyota is going through. We do not take a lot of joy in it," Mr Fields said.

    Honda, which is also facing vehicle troubles as it recalls some of its Accords and Civics due to faulty airbags, said companies have to deal with such situations in the best possible way they can.

    "We are not taking advantage of Toyota's situation at all. We have our own business to do, our own vehicles to sell. Toyota is a tough competitor and we will continue to compete with them in the marketplace," Honda's assistant vice president for public relations for America, Kurt Antonius said.

    A Suzuki official also said the company was 'sympathetic' with what is happening with Toyota.
    General Motors' Mr Reuss however admitted Toyota's vehicle recall "may be an opportunity for us to get some consideration from folks that we did not get before. (But) our products stand for themselves and may the best car win," he added.

    Mr Ruess said sales gains made by GM in January were not due to Toyota's recalls but the company had earned it on its merit.

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    ONGC, IOC, OIL consortium wins oil block in Venezuela

    These state-run Indian companies will develop the Carabobo-1 block in Venezuela's Orinoco Belt with Spain's Repsol and Malaysia's Petroliam Nasional

    Oil and Natural Gas Corp (ONGC) and its partners Indian Oil Corp (IOC) and Oil India Ltd (OIL) have won a bid to develop a major crude oil block in Venezuela, ONGC’s first major overseas success since the Imperial Energy Plc acquisition in 2008, reports PTI.

    The state-run Indian companies will develop the Carabobo-1 block in Venezuela's Orinoco Belt with Spain's Repsol YPF SA and Malaysia's Petroliam Nasional Bdh, ONGC said in a statement.

    An official said the group will pay $1.05 billion to Venezuela as signing amount and will initially invest another $9 billion in developing the block that can produce 400,000 barrels of heavy oil per day (20 million tonnes per annum). Total spending on the block over 25 years would be $9 billion. Besides, the consortium would also extend some credit to Venezuela's state oil company Petroleos de Venezuela SA (PdVSA), which would hold 60% interest in the project.

    Venezuela yesterday announced the winners of two of the three Carabobo blocks it had auctioned last month.

    The Latin American nation gave out 40% stake to international firms, the largest oil investment in President Hugo Chavez's 11-year rule.

    Chevron Corp will develop the Carabobo-3 block along with Mitsubishi Corp, Inpex Corp and Suelopetrol CA of Venezuela after paying a signing amount of $500 million.

    A third oil block in the Carabobo area of the Orinoco will be assigned at a later date.

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