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Change in pricing policy of interest on loans

Created by : RAMANATHA PRABHU N, Chartered Accountant  | 02 15 2010 10:46:55 +0000
Industry : BankingFunctional Area : India(Markets)
Keywords : rbi proposes to change existing pricing policy of interest on loans
Activity:  88 views;  last activity : 07 06 2010 20:18:09 +0000

Borrowers can now look forward to a more transparent pricing of their loans, as the Reserve Bank of India (RBI) has proposed the introduction of a new benchmark from April 1, 2010, which will reflect a more accurate movement in the interest rates.

The central bank plans to introduce a 'base rate', which will be computed on a cost-plus basis by each bank, and will be the floor price for all lending by the bank. The base rate system will replace the Prime Lending Rate (PLR) - the present benchmark rate used by the banks. Each bank will fix its base rate depending on its cost of funds. In order to arrive at the base rate, banks will have to factor in costs such as deposits cost, cost of maintaining Cash Reserve Ratio (CRR), cost of maintaining Statutory Liquid Ratio (SLR) and operating costs.

 Friends, is this new system is viable?

  
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I  feel that the base rate system will help the borrowers to compare interest rates which they are paying with the base rate. Floating rates will also come down when cost of funds for a bank declines. However we also fee that, such a pricing mechanism will require legislative changes to be made which might lead to the delay in implementation. If legislative changes are brought to books it will be a viable proposal.
By RAMANATHA PRABHU N, Chartered Accountant  02 15 2010 10:46:55 +0000
 
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I am not an expert on banking or on loan rates! but I feel that one of the most important factors bank use in deciding on lending rates is the risk exposure on loans. So the greater the risk, the more they will charge There is a possibility, however small, that banks will fall in to the 3 categoris - those that cater to high risk clients, those that cater to "reliable" clients and those that operate like they always did. I include in the last category the banks that are very slow to change like our old-time nationalised banks. 
By RAMESH KANDADAI, Principal Consultant, ARM Consultants  02 15 2010 11:11:20 +0000
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The newly introduced Base Rate is expected to be significantly lower than the prevailing Benchmark Prime Lending Rate (BPLR) and thus the beneficiary would be individual borrowers. Banks may determine their actual lending rates on loans and advances with reference to the Base Rate thus bringing a transparency in the loan interest pricing policy. It is expected that deregulation of lending rates will be introduced here also and will increase the credit flow to small borrowers at reasonable rate. Thus, direct bank finance will provide effective competition to other forms of high-cost credit.
By Swati Raut, Product Manager, Aviva  | 02 16 2010 09:00:25 +0000
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I think the new system of pricing policy will not be viable. As Mr. Ramanatha said, it will be based on the cost of funds, overhead costs, profit margin and adjustment for negative carry for CRR and SLR.

This means this may be against the prevailing BPLR of 11-15.75%, the base rate for almost all banks will be in single digits. For banks, it will mean an end to lending below the benchmark rate. Export finance and loans to low-income groups will be the only exception.  Banks will be forced to lower operational costs such as aggregate employee compensation for administrative functions, IT & ad spends, deposit insurance. For the large borrowers, they will have less bargaining power.
By Rashmi Chawla, Cust. Service Manager, Leading Bank  | 02 16 2010 08:51:36 +0000
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I quite agree with Mr. Khandadai's view. Three categories of banks indeed!! Thanks for the referral Ramanatha.
By Makrand Bhave, Marketing & MICE, WIZCRAFT International  | 02 16 2010 06:37:05 +0000
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