BPLR to Base Rate in Banking - 2010

The Reserve Bank constituted a Working Group on Benchmark Prime Lending Rate chaired by Shri Deepak Mohanty to review the present benchmark prime lending rate (BPLR) system and suggest changes to make credit pricing more transparent. After considering the recommendations of the Group, RBI proposed to replace the current system of benchmark prime lending rate (PLR) with a new base rate which will be made effective from 1st July 2010.

·        What is Benchmark Prime Lending Rate(BPLR)?

It is the interest rate that commercial banks charge their most credit-worthy customers. Banks are free to fix Benchmark Prime Lending Rate (BPLR) for credit limits over Rs.2 lakh with the approval of their respective Boards.

·        What is Sub-PLR?

Sub-prime lending usually refers to the practice of giving loans to those who do not qualify for regular loans at market interest rates because of their poor credit history. These loans are risky for both, those who are giving and those who are taking, because these combine high interest rates and bad credit history.

What are the changes made?

·        The base rate, which will replace the prime lending rate (PLR), is aimed at bringing more transparency in loan pricing.

·        The actual lending rates charged to borrowers would be the Base Rate plus borrower-specific charges, which will include product-specific operating costs, credit risk premium and tenor premium.

·        All categories of loans should henceforth be priced only with reference to the Base Rate.

·        Since the Base Rate will be the minimum rate for all commercial loans, banks are not permitted to resort to any lending below the Base Rate. This comes in the backdrop of the BPLR system failing to achieve what it was originally intended for -- transparency in lending rates charged by banks.

·        The current stipulation of BPLR as the ceiling rate for loans up to Rs 2 lakh stands withdrawn.

·        Each bank may decide its own base rate as a reference from July 1^st. The actual lending rate decided on individual basis takes into account the base rate plus charges specific to the individual borrower based on his credit profile, loan eligibility and other criteria relevant to lending norms practiced by the banks.

Why RBI chosen for the new Base rate for all Scheduled Commercial banks?

Lending operations of a bank need to aid growth in the economy by directing fund flow towards productive uses at reasonable interest rates. In this context, interest rates play a crucial role and are critical to the rise and fall of the economy.

At present in India, around 70% of the loans are below PLR/sub-PLR.

RBI have a ample evidence of this in the United States housing boom and crash, which indicates that lack of regulation and transparency in the credit system can create havoc in the economy. So that’s why RBI has decided to go for new Base rate which replaces BPLR.

However RBI has given some exemptions in the new base rate:

Loans against fixed deposits, loans given by a bank to its own employees, as well as restructured loans, where borrowers get more time and pay lower rates to avert defaults, can be given at interest rates that are below the base rate.