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Separate rules for interest rate

business Updated: Apr 04, 2010 21:14 IST
Mahua Venkatesh
Mahua Venkatesh
Hindustan Times
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Loans to farmers, small entrepreneurs and exporters are most likely to be governed by a different set of rules and not come under the ambit of the proposed new base rate lending system that is scheduled to come into force from July.

The Reserve Bank of India (RBI), which will present the annual monetary policy review later this month, will separately announce norms for credit to exporters, small industries and farm loans that have government-assisted subsidy components.

The base rate system, which would serve as the minimum rate for all loans, would replace the current practice of pricing loans based on the benchmark prime-lending rate.

At present, about 70 per cent of all loans are given below the BPLR. In the new scheme, banks would not be allowed to lend below the base rate.

While each bank may decide its own base rate, it will be calculated on the cost of deposits, the banks’ administrative and operational costs and statutory costs.

Banks will have to provide information on the actual minimum and maximum lending rates charged to major categories of borrowers on a quarterly basis.

Banks sometimes artificially keep the BPLR at high levels to cover for lower incomes from loans given to farmers, exporters and small industries where the government regulates the interest rates.

“We are awaiting certain guidelines from the central bank for pricing certain priority sector lendings, once there is clarity on the issue, banks would be in a position to arrive at their own base rates,” a chairman of a public sector bank, who did not wish to be identified, said.

Bankers had also urged the central bank not to link pricing of all home loans with base rate as that would push up the rates significantly upward.

S.K. Goel, chairman and managing director of UCO Bank told Hindustan Times that banks are “more or less” ready to implement the base rate system for pricing loans.

“We are prepared to move to the new system but we are awaiting RBI guidelines and clarity on certain issues regarding fixing interest rates for certain key sectors,” he said, adding that the guidelines could be announced by this month.