The Reserve bank of India on Friday released the guideline on the Base Rate system (wherein commercial banks will fix their lending rates based on their cost of funds).
This system will replace the existing benchmark prime lending rate (BPLR) system on July 1, 2010.
All categories of loans will now be priced only with reference to the base rate. Base Rate would be the minimum rate for all loans, and banks will not be allowed to lend below it, ending discounted loans.
“This will bring an end to the teaser rates as banks won’t be able to lend below the base rate,” said TM Bhasin, CMD, Indian Bank. “Also the lending rates for corporates may go up.”
However the customers may see transparency.
“This will bring some transparency but I do not think lending rates will change much,” said an official at a private sector bank on the condition of anonymity.
The RBI statement on Friday said the deregulation of lending rates would increase the credit flow to small borrowers at reasonable rate.
The base rate system will be applicable for all new loans, and for those old loans that come up for renewal. In case an existing borrower wishes to switch to the new system, he may be given an option (to switch over without any additional charge) by the bank.
RBI has given a period of six months (till December 2010) to the banks to stabilise the system of base interest rate.