| The ‘rigid’ model is also pushing India Inc to borrow abroad at lower rates
Base rate, the Reserve Bank of India’s tool to make Indian banking transparent, is being blamed for market lending rates not keeping pace with RBI’s interest rate cuts.
The introduction of the base rate concept three years ago has robbed the banks of flexibility to lend below benchmark interest rates in times of sluggish demand. Rigid base rate of banks, when deposit growth rate is near a decade low, is also inducing many Indian corporates to borrow from the overseas markets where funds are available at low rates.
 “The flexibility to price loans below the benchmark rate has gone,” said Parthasarathi Mukherjee, president, large corporates, Axis Bank.
Governor Duvvuri Subbarao in April 2010 made base rate, the rate below which banks cannot lend and is computed based on a bank’s cost of funds, mandatory for banks. This was introduced to prevent banks from lending below their cost even if it is to top-rated customers. This was also aimed at preventing retail borrowers from subsidising big corporates.
Some bankers blame the base rate, which was intended to remove the anomalies, being the reason for market lending rates falling just about 40 basis points even after the RBI lowered rates by more than 100 basis points since last year. A basis point is 0.01 percentage point. Banks are holding back from lowering the base rate since it would lead to lower rates across the spectrum, squeezing their profitability. Before April 2010, banks were lending at below benchmark rates to some clients that boosted loans and at the same time minimise the hit on profitability.
The slow slide in local lending rates and policymakers insisting that unsecured loans should not be done outside of consortium are pushing Indian companies to borrow overseas. Companies borrowed $31 billion last fiscal in loans. Overseas bond sale is also accelerating at $2.5 billion so far this year.
“That (unsecured loans) segment of lending has disappeared after the implementation of base rate,” said ADM Chavali executive director Indian Overseas Bank. “Now, sub-PLR has moved to the base rate, which has become a little expensive for corporates. They are either exploring the ECB market, or the bond market.”
Benchmark prime lending rates, the predecessor to base rate, was abused by banks, hence the RBI came up with a new benchmark. “Competition has forced the pricing of a significant proportion of loans far out of alignment with BPLRs and in a non-transparent manner, undermining the role of the BPLR as a reference rate,” said a RBI-appointed committee, headed by its executive director Deepak Mohanty.
“There was also widespread public perception that the BPLR system has led to cross-subsidisation in terms of underpricing of credit for corporates and overpricing of loans to agriculture and small and medium enterprises.”
The share of sub-BPLR lending for scheduled commercial banks rose to 77% in September 2008, from 28% in March 2002. For private sector banks, it was at 91% in March 2007. But bank loans growth, which is at 15%, may begin to improve with companies’ credit rating getting a hit due to the economic slowdown. Investors are averse to buying bonds sold by lower-rated companies.
“Corporate bonds can come below the base rate, but it depends on the rating of a company,” said Sanjay Arya, executive director, United Bank of India. “Loans are longterm contracts and banks could have given loans at a lower rate in the earlier regime of BPLR. But things are different now.”
CMDs of Banks who had praised Base Rate Policy When RBI decided to Introduce it in all banks are now blaming base Rate system for poor credit growth , for not reducing interest rate and for asset liability mismatch. I submit below the news items published in this regard three years ago i.e. on 21st October 2009. Yesman CMD cannot talk of what is good for the system , they talk which can do good for their personal career. Scrap PLR, use accurate base rate: Panel-Economic Times News of 22nd Oct 2009
MUMBAI: Home loan borrowers can look forward to a fairer deal from banks after a Reserve Bank of India (RBI) panel has proposed a transparent pricing structure for floating rate loans wherein benchmark rates get automatically revised on shrinking cost of funds.
The committee headed by RBI executive director Deepak Mohanty has suggested discontinuing the usage of a bank's prime lending rate (PLR) as the benchmark for variable rate loans. Instead, it wants banks to arrive at a base rate that reflects the cost of one-year deposits and price loans over this base rate. As reported by ET, the panel has also proposed a ceiling on the extent of loans that can be granted below the benchmark rate. Most banks typically pass on the benefit of falling rates only to fresh customers. RBI governor D Subbarao has repeatedly said though the central bank has slashed its repo rate (at which it lends to banks) by 425 basis points in the last one year, prime lending rates of banks have fallen by only around 200 basis points. "It will be game-changer. If the report is accepted, it will bring more transparency and do away with opaqueness that currently exist in the system," said MV Nair, chairman of Indian Banks' Association and CMD of Union Bank of India. He said the current practice of lenders arbitrarily quoting rates and borrowers demanding uneconomically low rates will go. According to AC Mahajan, chairman, Canara Bank, "The new system of base rate will help banks to price their loans more efficiently". But according to some bankers, though the base rate would be transparent and more efficient than the PLR system, it has its infirmities. For instance, base rate may account for the cost of acquiring deposits, but will ignore the cost of non-performing assets, which are also a drag on bank balance sheets. Bankers also said moving over to the new system would not make home loans cheaper or more expensive. This is because the present base rate for public sector banks is around 8.55% while most of them price their home loans at 9.75-10%. In a separate development, the finance ministry said it is hopeful of the RBI continuing with the current easy monetary stance when it takes stock of the situation later this month. "We hope the current stance to continue ... which is appropriate and justified," finance secretary Ashok Chawla said.
Copy of news of aforesaid date in available in following link
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http://jaindanendra.blogspot.in/2012/07/what-wrong-is-finance-secretary-mr.html
Saturday, April 28, 2012
Why not Uniform Interest Rate
The war continues among banks on interest rate. After nationalization of banks in 1969, RBI used to decide rate structure for deposits and for lending uniformly applicable for all banks. But after adoption of reformation policy in the year 1991, RBI freed lending rates excepting loans upto Rs.2.00 lacs. In the name of competition, banks started rate war to attract high profile customers into their fold. Social banking concept and mass banking approach initiated through nationalization of banks have now become the history.
After all it is not father’s money of any CMD of any bank, it is public money. It is very much sorry state of affairs that these Banks collect major chunk of low cost deposits from retail depositors but finance major chunk of their money at low rate to big corporate .
Banks offer lower rate of interest for big value advances and offer higher rate for big value deposits but charge higher rate on low value lending and offer lower rate on deposit of low value deposits.
After all all PSBs are sons of same government and hence there is no question on competition among brothers and that too at the cost of family's interest.
http://danendrajain.blogspot.in/2012/04/why-not-uniform-interest-rate.html
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