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Banks to dole out discounted loans despite base rate regime

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Press Trust of India New Delhi

Banks will not lend below the minimum or base interest rate from today as directed by RBI, but may continue to give cheaper credit to some preferred clients as per their discretion under existing agreements.

While public sector major State Bank of India has made its intentions partly clear in this regard, industry sources said that some of the top private sector banks might do the same.

RBI's direction on having a base rate--the minimum rate below which banks cannot lend with effect from July 1, was largely aimed at bringing parity between different classes of borrowers and discourage discounted lending by banks to blue-chip customers, mostly large corporate houses.

 

However, the banks seem to have found a loop-hole in the whole exercise in the name of loan agreements already signed with their existing clients.

Almost all the banks have announced their respective base rates, being effected from today, which range between 7.0-8.75 per cent. This means they would have to lend at a rate equal to or above these base rates.

In the previous regime, the banks' interest rates were linked to their Benchmark Prime Lending Rates decided by them from time to time.

In the earlier system, the banks could lend at a rate above the BPLR, and even below that for their preferred customers. But discounted rates are not allowed in base rate regime.

However, to honour the existing loan agreements signed with their customers, the banks can give the customer an option to continue with the Benchmark Prime Lending Rate system till the facility falls for renewal or review.

If the customers want to switch over to the base rate regime they are allowed to do so on their existing loans also.

A circular to this effect was issued by State Bank of India today, the first day of its base rate regime, wherein it has fixed the rate at 7.5 per cent.

Sources said that some of the leading private sector lenders are also going to follow the same model, where they would allow the existing customers to continue with their existing rates if they desire so.

This is despite, the banks having the right to change the rates or even enforce a renewal or review of the rates as per their convenience in floating rate schemes.

But, they are giving this option as they do not want to lose blue-chip customers, especially large corporate clients.

As such, SBI has also decided to continue its teaser home loan rates, where it offers an aggressive 8 per cent interest rate for the first year and subsequently increase it in later years. The scheme was earlier valid till yesterday. Such offers have already come in for criticism by RBI and government officials.

 

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First Published: Jul 01 2010 | 1:33 PM IST

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