Mumbai: A Reserve Bank of India (RBI) panel has recommended abolition of concessional rate of interest to small borrowers and exporters and introduction of a so-called base rate system replacing the present system of prime lending rate (PLR).
RBI put up the panel report on its website on Tuesday, inviting comments from public till 17 November. PLR is the rate at which banks lend to their most credit-worthy customers.
The panel, chaired by RBI executive director Deepak Mohanty, said once the base rate is introduced, “there will not be any need to extend any concessional export credit”, and if “any special dispensation is considered necessary, it should come explicitly from the government in the form of interest rate subvention”.
Currently, loans to exporters are given at 250 basis points below a bank’s PLR. One basis point is one-hundredth of a percentage point.
Once the base rate is introduced, overall rates will fall to levels lower than the present loan rates.
Even if the administered rate system is abolished, exporters will still be able to avail loans at a cheaper rate as the base rate will be significantly lower than the prime rates, the panel said. At present, most of the banks lend to exporters at 9.5%, and public sector banks’ PLRs vary between 11% and 13.25%.
The group has suggested scrapping of concessional rates to small borrowers for loans up to Rs2 lakh as “the experience reveals that lending rate regulation has dampened the flow of credit to small borrowers and has imparted downward inflexibility” to PLRs.
The same is the case with export credit and exporters could still be able to access credit at lower than the base rate if the liquidity is good. However, the interest rate on export credit in rupee terms “should not exceed the base rate of individual banks”, as export credit is short-term in nature and there is need to incentivise export credit for exporters to be globally competitive, the panel said. The group is in favour of introducing a base rate as the PLR “has tended to be out of sync with market conditions and does not adequately respond to changes in monetary policy”. It is also not transparent.
According to the panel, banks’ tendency to lend at below PLR, due to competitive pressures, raises concerns of transparency. The proposed base rate will include “identifiable cost elements” that are common across borrowers.
It would include the card rate on one-year deposits below Rs15 lakh and consider adjustment for the banks’ mandatory investments in government bonds and cash kept with the central bank. The base rate will also include unallocatable overhead cost for banks and average return on net worth.
“The actual lending rates charged to borrowers would be the base rate plus borrower-specific charges, which will include product-specific operating costs, credit risk premium and tenor premium,” the report said.
While there would not be any need for banks to lend below the base rate, as the rate would be the “bare minimum rate below which it will not be viable for the banks to lend,” the group has suggested that a large surplus of liquidity may induce banks to lend below this rate as the excess fund deployed with RBI fetches only 3.25% return. However, this could come as exception and hence the group has suggested that the base rate be applicable to loans with a maturity of one year and above.
The panel has also recommended that such sub-base rate lending should not exceed 15% of the incremental lending during the fiscal year.
The exceptions to this base rate system could be interest rates on loans relating to selective credit control, credit card receivables and loans to banks’ own employees as well as differential rate of interest scheme for the deprived sections of the society.
The panel, however, is in favour of administered rate in education loans in view of the critical role played by such loans in developing human resource skills. Since the base rate will be significantly lower than PLR, the group recommended that interest rates on all education loans should not exceed the average base rate of five largest banks plus 200 basis points.
The Indian Banks’ Association, the apex bankers’ lobby in the country, should put out the average base rate for this purpose every quarter, the committee has suggested.
Banks should provide information on lending rates including the actual minimum and maximum interest rates charged to borrowers to RBI, the panel has suggested.