Mapping of spreads means effective rates in the base rate system are lower
Three months after the base rate regime to price loans began, only a handful of customers have shifted to it from the erstwhile benchmark prime lending rate (BPLR) system.
But don’t blame only lack of customer awareness. Banks are also finding it more profitable to keep customers in the BPLR regime. This is because the ‘exact mapping’ envisaged by banks has not happened. Mapping refers to keeping the effective interest rate intact while shifting from BPLR to the base rate. For example, if a client was charged BPLR plus two per cent for working capital loans, assuming a 12 per cent BPLR, in the base rate it would have been base (eight per cent) plus six per cent with mapping.
But this hasn’t happened as bankers fear a hue and cry among customers in case high spreads are shown. “No new customer will come to banks if spreads are shown as high as 600 basis points (bps), which were 200 bps in the BPLR regime,” said a senior banker from a public sector bank.
What has happened in some cases is mapping of spreads, instead of the mapping of rates, because of which effective interest rates are lower in the base rate system than in the earlier regime. As a result, according to a senior public sector bank executive, “In some cases, it is not viable for the bank to shift the customer to a base rate, if spreads are mapped. For example, in case of a client who pays interest linked to BPLR (of 10 per cent), he is charged 14 per cent on a term loan, which captures risk, including credit risk.”
Now, if this SME client is shifted to the base rate system, if spreads are intact, the effective rate charged will be 12.5 per cent if the base rate is 8.5 per cent. This would mean a dip in interest income for the bank, something not acceptable at a time income growth was subdued, he added.
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And since, according to norms, both the parties have to agree to such a shift, banks are not interested in shifting the loan to the base rate mechanism, a s spreads will be lower. As a result, most government-owned banks have seen only 10-20 per cent of the loans shifting to the base rate regime.
“So, as far as working capital loans are concerned, these are mostly for a year. So, it is better for us to wait until the contract comes for renewal,” said the chairman and managing director of a mid-sized public sector bank.
In term loans, especially to retail borrowers, it is mostly the borrowers who are not willing to shift, as they find that the BPLR rates are lower.
Though most banks have implemented one round of increase in BPLR, mainly to encourage existing borrowers from moving to the base rate, bankers feel another round of BPLR rise is required to induce term-loan takers into the base rate regime.
The bankers had requested RBI to invoke a sunset clause for all BPLR-linked loans. RBI is studying the legal implications of the clause. This is because certain customers can move court if the original contract agreement is not honoured.