Norms for base rate to come before monetary policy announcement
By Neelima Shankar
Apr 9, 2010
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It is expected that the Reserve Bank of India would be announcing the final norms for base rate before the announcement of the Annual Monetary Policy for financial year 2010-11. The monetary policy is set to come on the 20th of April 2010.

A senior official of the Indian Bank's Association said, "The monetary policy department of RBI had come up with the draft circular and now the department of banking operations & development is working on the final guidelines. I expect the final guidelines to come even before the RBI announces the monetary policy on April 20."

The continuing feud between the RBI and commercial banks over the implementation of base rate has delayed the announcement so far.

Previously, the RBI had decided that the base rate would be applicable from 1st April 2010 but after prolonged discussion with top bankers, it shifted the base rate till 1st July 2010.

"There is some resistance from corporates towards implementation of this base rate," said an official of a private sector bank.

The major cause of mismatch of opinions regarding the implementation of base rate is due to the fact that once the base rate comes into play corporates will no longer be able to avail loans at sub BPLR rates. The current BPLR is somewhere around 11-12% but corporates used to avail loans at rates as low as 4%.

These corporates constitute the priority sector of banks and if they divulge out owing to higher interest rates, the balance sheet of banks is going to suffer a huge setback.

According to a public sector bank chief, "The implementation of base rate is an experiment. We don't know what impact it may have on the balance sheet of banks and corporates."

However, some have a view that even if the base rate is not implemented, it would be very difficult for corporates to avail loans at such low rates owing to tightening monetary measures applied by the RBI to tame the towering inflation.

"This is because liquidity may tighten further in the time to come and credit off take will pick up. This would make loans more expensive for corporates," a banker said.


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