“Transparency” was the key word when the Reserve Bank of India (RBI) freed the interest rates from a regulated regime from April 2010. The newly introduced Base Rate is expected to be significantly lower than the prevailing Benchmark Prime Lending Rate (BPLR) and thus the beneficiary would be individual borrowers.
In a notification to all scheduled commercial banks, the RBI stated that the Base Rate system will replace the BPLR system with effect from April 1, 2010. Banks may determine their actual lending rates on loans and advances with reference to the Base Rate.
Deregulation
“It is expected that deregulation of lending rates will increase the credit flow to small borrowers at reasonable rate. Thus, direct bank finance will provide effective competition to other forms of high-cost credit,” RBI noted in its guideline to all banks.
Base Rate would include all those elements of the lending rates that are common across all categories of borrowers. While each bank may decide its own Base Rate, some of the criteria that could go into the determination of the Base Rate are: (i) cost of deposits; (ii) adjustment for the negative carry in respect of CRR and SLR; (iii) unallocatable overhead cost for banks such as aggregate employee compensation relating to administrative functions in corporate office, directors’ and auditors’ fees, legal and premises expenses, depreciation, cost of printing and stationery, expenses incurred on communication and advertising, IT spending, and cost incurred towards deposit insurance; and (iv) profit margin.
The actual lending rates charged would be the Base Rate plus borrower-specific charges, which would include product-specific operating costs, credit risk premium and tenor premium.
Source : http://www.hindu.com/biz/2010/02/15/stories/2010021550041400.htm
In a notification to all scheduled commercial banks, the RBI stated that the Base Rate system will replace the BPLR system with effect from April 1, 2010. Banks may determine their actual lending rates on loans and advances with reference to the Base Rate.
Deregulation
“It is expected that deregulation of lending rates will increase the credit flow to small borrowers at reasonable rate. Thus, direct bank finance will provide effective competition to other forms of high-cost credit,” RBI noted in its guideline to all banks.
Base Rate would include all those elements of the lending rates that are common across all categories of borrowers. While each bank may decide its own Base Rate, some of the criteria that could go into the determination of the Base Rate are: (i) cost of deposits; (ii) adjustment for the negative carry in respect of CRR and SLR; (iii) unallocatable overhead cost for banks such as aggregate employee compensation relating to administrative functions in corporate office, directors’ and auditors’ fees, legal and premises expenses, depreciation, cost of printing and stationery, expenses incurred on communication and advertising, IT spending, and cost incurred towards deposit insurance; and (iv) profit margin.
The actual lending rates charged would be the Base Rate plus borrower-specific charges, which would include product-specific operating costs, credit risk premium and tenor premium.
Source : http://www.hindu.com/biz/2010/02/15/stories/2010021550041400.htm
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