Feud over base rate still continues
By Neelima Shankar
Apr 8, 2010
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The issue over the implementation of base rate for loan pricing still has differences of opinion between Reserve Bank of India and the commercial banks. It is because of these differences that the final guidelines on base rate are still to be brought out.

RBI says that the guidelines for base rate implementation should bear the statement: "lending rates will be fair and non-discriminatory to all retail and small borrowers (mainly farmers)."

Banks object to this statement saying that this statement can give rise to numerous problems between banks and its borrowers.

RBI's draft on base rate guidelines also reads: "Apart from transparency, banks should ensure that interest rates charged to customers in the above arrangement (base rate system) are non-discriminatory in nature". Banks say that this statement should be dropped from the draft but RBI is unwilling to do so.

RBI has come up with this new system of loan pricing to prevent any kind of discrepancy arising in the loan pricing mechanism and thus bring about transparency in the system. There have been many cases when different interest rates have been charged to the same borrower. Also banks charge lesser interest rates to bigger corporates depending to their creditworthiness.

"The RBI wants to protect the interests of retail and small customers. As far as companies are concerned, they are well-placed to extract the best deal for themselves," said the official.

Base rate is to come into effect from 1st July 2010. It would replace the BPLR system of lending. The major feud between the RBI and commercial banks is on the issue as to which amongst the two is better- base rate or BPLR?.

RBI is constantly sticking to its point of inserting the ‘fair and non-discriminatory clause' to avoid a repetition of what happened in the recent interest rate cycle. The retail borrower was unable to cash the full benefit of fall in interest rates.


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