Led by State Bank of India — the country’s largest lender — banks have asked the Reserve Bank of India to invoke the sunset clause on benchmark prime lending rate (BPLR), and has argued such a move will reduce interest rates for customers by 50-75 basis points as they will shift to base rate.
BPLR is the erstwhile benchmark rate for all loans, and was replaced by base rate in July 2010. While all new loans were disbursed using base rate as the reference, it was not made mandatory for old customers — who were given loans in the BPLR regime — to shift to base rate. When the base rate was introduced in 2010, even then bankers had demanded the end of the BPLR regime by invoking the sunset clause.
The demand for the sunset clause is being made again by banks at a time when the central bank is reviewing the loan pricing mechanism. A committee under RBI Deputy Governor Anand Sinha is looking into the issue of transparency in loan pricing and also studying the efficacy of base rate with respect to transmission of monetary policy.
| RATE CARD | ||
| Bank | Base rate | BPLR (%) |
| State Bank of India | 10.00 | 14.75 |
| ICICI Bank | 9.75 | 17.50 |
| HDFC Bank | 9.80 | 18.30 |
| Punjab National Bank | 10.50 | 14.00 |
| Bank of Baroda | 10.50 | 14.00 |
| Union Bank of India | 10.50 | 15.00 |
| Canara Bank | 10.50 | 14.75 |
| BPLR: Benchmark prime lending rate Source: Banks | ||
Banks had aggressively hiked BPLR in the last two years, following 13 interest rate increases by RBI between March 2010 and October 2011. The move was also aimed at encouraging borrowers to shift to the base rate regime.
Bankers said borrowers were given loans at sub-BPLR rates while in the base rate regime. But a spread was added to the base rate. Yet, effective lending rate under base rate is still 50-75 bps lower than that of the BPLR regime. They said only about 30 per cent of the borrowers are yet to shift to the base rate despite continuing to pay higher interest.
“There is an administrative cost in running the BPLR system,” said a banker who is involved with the discussion on this matter with the regulator. “SBI has written to the central bank to invoke the sunset clause for all banks, which will not only benefit the banks but also reduce the interest rate burden of the customers.”
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SBI’s base rate is 10 per cent while its BPLR is at 14.75 per cent.
In 2010, banks had requested RBI to invoke the sunset clause. The regulator refused, citing legal complications as the banks had entered into a contract, which needs to be honoured, while giving a loan, and the customer cannot be forced to shift to base rate.
Banks have also asked RBI to allow them to review the base rate formula at least once in three years. When the base rate mechanism was introduced, RBI allowed banks to tweak the formula for one year. But the formula cannot be changed after one year.
During interactions with bankers, it was also noticed by the regulator that banks were using various indicator to capture its cost of funds. The committee reviewing the loan pricing suggested that marginal cost of funds could be a better indicator for cost of funds. However, the proposal has not found favour with banks having higher current account and savings account deposit (as a portion of total deposits), as increase in marginal cost will not reflect the overall cost increase of the bank.