Base rate will not raise borrowing cost: RBI
Thursday, June 17, 2010
, Posted by Unknown at 4:54 AM
The Reserve Bank of India (RBI) has said the base rate system will not increase the effective cost of borrowing as projected by the corporate lobby.
“There is some apprehension that the base rate system may raise the effective cost of borrowings. This is unlikely because corporates have access to multiple sources of funds and hence the effective borrowing rates will be determined by market competition,” said RBI executive director Deepak Mohanty, speaking at the Bankers’ Club in Kolkata.
Last week, a survey by corporate lobby Ficci said the new regime of base rate will make borrowing costlier from banks for highly-rated companies.
Deepak Mohanty, who also chaired the working group on benchmark lending rates that suggested introduction of base rate mechanism, said the deregulation in lending rates will promote financial inclusion and improve the efficiency of financial intermediation of banks.
“This, along with other measures taken by RBI for financial inclusion, will draw borrowers away from the informal financial sector and towards the formal financial sector and facilitate credit penetration,” he said.
He also felt the new system will deepen the money market as it gives banks freedom to choose other market-related benchmarks besides their base rates for pricing floating rate products.
“This could promote development of market benchmarks. It could also deepen the money market to facilitate short-term liquidity management by banks,” he said.
Mr Mohanti pointed out that the base rates will mirror banks relative efficiency and cost structure.
While lending rates tend to be sticky, it is expected that the base rate system will show greater flexibility and strengthen both the interest rate and credit channels of monetary transmission. RBI has given banks complete freedom in their loan pricing decisions while ensuring transparency.
Base rate is the minimum rate that banks can charge any customer and no bank will be allowed to lend below the base rate.
Also, under the new regime, there is no ceiling on loans to farmers and rupee loan to exporters. Base rate will come into effect from July 1 and will replace prime lending rate for all new loans. Most PSU banks are expected to peg their base rate in the range of 8-9%.
He said the lack of transparency in the BPLR system had hindered transmission of monetary policy signals. “Competition in an environment of excess liquidity had forced the pricing of a significant proportion of loans far out of alignment with BPLRs undermining its role as a reference rate.
Furthermore, there was a growing public perception of under-pricing of credit for corporates and over-pricing of credit to agriculture as well as small and medium enterprises,” he said.
“There is some apprehension that the base rate system may raise the effective cost of borrowings. This is unlikely because corporates have access to multiple sources of funds and hence the effective borrowing rates will be determined by market competition,” said RBI executive director Deepak Mohanty, speaking at the Bankers’ Club in Kolkata.
Last week, a survey by corporate lobby Ficci said the new regime of base rate will make borrowing costlier from banks for highly-rated companies.
Deepak Mohanty, who also chaired the working group on benchmark lending rates that suggested introduction of base rate mechanism, said the deregulation in lending rates will promote financial inclusion and improve the efficiency of financial intermediation of banks.
“This, along with other measures taken by RBI for financial inclusion, will draw borrowers away from the informal financial sector and towards the formal financial sector and facilitate credit penetration,” he said.
He also felt the new system will deepen the money market as it gives banks freedom to choose other market-related benchmarks besides their base rates for pricing floating rate products.
“This could promote development of market benchmarks. It could also deepen the money market to facilitate short-term liquidity management by banks,” he said.
Mr Mohanti pointed out that the base rates will mirror banks relative efficiency and cost structure.
While lending rates tend to be sticky, it is expected that the base rate system will show greater flexibility and strengthen both the interest rate and credit channels of monetary transmission. RBI has given banks complete freedom in their loan pricing decisions while ensuring transparency.
Base rate is the minimum rate that banks can charge any customer and no bank will be allowed to lend below the base rate.
Also, under the new regime, there is no ceiling on loans to farmers and rupee loan to exporters. Base rate will come into effect from July 1 and will replace prime lending rate for all new loans. Most PSU banks are expected to peg their base rate in the range of 8-9%.
He said the lack of transparency in the BPLR system had hindered transmission of monetary policy signals. “Competition in an environment of excess liquidity had forced the pricing of a significant proportion of loans far out of alignment with BPLRs undermining its role as a reference rate.
Furthermore, there was a growing public perception of under-pricing of credit for corporates and over-pricing of credit to agriculture as well as small and medium enterprises,” he said.
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