Just a few days before the new loan pricing regime begins on July 1, the government has asked all public sector banks to quantify their effective interest rates for small borrowers under the new base rate mechanism. The ministry also wants a comparison with the rates under the present benchmark prime lending rate system.
In a letter to the Indian Banks Association on Saturday, the Union finance ministry has also asked it to collect data on the effective lending rates for home, automobiles and education loans.
The ministry’s letter comes when not a single bank has announced its base rates. State Bank of India, the country’s largest lender, which earlier said it would do so by June 15, is yet to do so. All other banks, expected to react after taking into account the market leader’s stand, have also maintained silence.
Sources in the know said the government wants to ensure the new regime, while bringing in transparency, would not hurt the interests of small borrowers. Bankers have said the new mechanism will put an end to cross-subsidisation, with small borrowers no longer having pay more to compensate the low rate charged to bigger players with better bargaining powers. Yet, the government wants to be doubly sure.
The base rate regime, proposed by a committee set up by the Reserve Bank of India (RBI), to bring transparency on how risks are priced by the lenders, had mandated that no lending could be done below the base rate, except for three categories: loans to banks’ own employees, against deposits and small-ticket borrowers under the differential interest rate (DRI) scheme.
However, banks later said if the RBI directive was to be followed, they would not be able to extend loans to the farm sector at seven per cent for availing the maximum two per cent interest subvention from the government. As a result, agricultural loans were excluded, as also export credit and interest on restructured assets, from the application of base rates.
