Banks ask regulator to create awareness for ‘base plus’ regime.
The Reserve Bank of India (RBI) has assured banks it will keep agriculture loans outside the base rate ambit. The base rate guidelines, issued in April, had barred lending below base rate, except for three categories: loans to banks’ own employees, loans against deposits and small-ticket borrowers under the differential interest rate (DRI) scheme.
The addition of the fourth category means agriculture loans can also be priced below the base rate. The RBI assurance comes at a time when it has been talking about deregulation of savings rates.
Senior bankers, who met top RBI officials last week, said there is enough logic for the regulator’s assurance. Rules framed by the government say a bank is eligible to avail a maximum 2 per cent interest rate subvention if it lends to the farm sector at seven per cent. “If the base rate is eight per cent, then we will not be able to lend at seven per cent to the farm sector and hence will not be eligible for the subvention,” a banker said. The base rate regime comes into effect from July 1.
A banker who attended the meeting with RBI Deputy Governor Usha Thorat said keeping agriculture loans outside the base rate ambit means banks will continue to lend at seven per cent, even if their base rate is higher than that.
In its final guidelines on base rate, the regulator had withdrawn the stipulation of benchmark prime lending as the ceiling rate for loans up to Rs 2 lakh, which meant banks would have had to link farm loans to the base rate. Bankers also expressed concern that since the base rate was to be much lower than the existing benchmark prime lending rates, the actual lending rate to small borrowers may be as high as 14-15 per cent.
“Customers are now used to the BPLR-minus regime, but from July 1 it will be a base rate-plus regime. While 70 per cent of the loans were below the BPLR, loans which are above BPLR had spreads of one-two per cent. In the base rate system, spreads can go up to six per cent or even more,” a banker said.
Banks have thus requested the central bank to initiate an awareness programme so that there is no adverse public reaction.
Banks have also requested RBI for a sunset clause in shifting customers to the base rate. Many borrowers may not be willing to shift from BPLR to the base rate as interest rates for them may rise in the new regime.
Another grey area for the base rate implementation was export credit. The present regulation says that for pre-shipment rupee export credit, banks should lend 250 basis points lower than the BPLR and then avail maximum 2 per cent subvention from the government. However, in April, RBI had issued a circular that barred banks from lending to the sector below the base rate and said banks were free to decide on the lending rate for export credit at or above the base rate.
However, the problem in this case is that the subvention circular of the government is based on BPLR. The central bank has told bankers the matter will be taken up with the commerce ministry and resolved.
