Base rate for banks effective from July 1 | india | Hindustan Times
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Base rate for banks effective from July 1

india Updated: Mar 08, 2010 13:22 IST
Reserve Bank of India

The Reserve Bank of India (RBI) said on Friday the new base lending rate for banks, to bring more transparency to loan pricing, will take effect from July 1.

The base rate will be the new reference rate for determining lending rates for banks, and will be implemented three months later than earlier planned.

"It will start from July 1. They (banks) wanted some time," RBI Deputy Governor Usha Thorat told reporters after the central bank met with heads of state-run banks.

Banks in India tend to charge their biggest corporate borrowers less than published prime rates, which they would no longer be able to do on new loans from July 1.

The central bank has expressed concern over banks offering short-term loans well below their prime rates to companies and mortgage borrowers as the banking system is flush with liquidity.

Year-on-year loan growth skidded to 9.7 per cent in late October 2009, but an economic recovery in Asia's third-biggest economy pushed it up to 15.1 per cent in mid-February.

The actual lending rate charged to borrowers would be the base rate plus borrower-specific charges including operating costs, according to draft guidelines on the RBI website.

After the implementation of the new loan pricing system, existing borrowers would continue to pay at existing rates, while the base rate would apply to new customers.

The new base rate system is intended to allow cuts in interest rates by banks to be passed on to all customers rather than a few large corporate clients.

It would also check aggressive lending to clients in sectors such as real estate, which are prone to bubbles.

Indian banks tend not to adjust rates in lockstep with central bank moves.

Large Indian companies with good credit are able to borrow at interest rates below 10 per cent, below average benchmark prime lending rates for banks of around 11-12 per cent.