Base rate: big firms to feel the heat?

Implementation of the new base rate system for banks beginning July 1, 2010, is likely to increase the cost of borrowing for large companies, according to a survey of bankers and economists conducted by the Federation of Indian Chambers of Commerce and Industry.

Implementation of the new base rate system for banks beginning July 1, 2010, is likely to increase the cost of borrowing for large companies, according to a survey of bankers and economists conducted by the Federation of Indian Chambers of Commerce and Industry (FICCI). However, the transparency factor will help the smaller borrower to negotiate a better rate, the survey said.

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Big corporates may resort to other low-cost financing options such as commercial paper, qualified institutional placement, external commercial borrowing, resulting in lower credit off-take for banks, the survey said.

“As the base rate of all banks would be publicly available, companies will be able to compare rates charged by different banks; hence the skill to negotiate will have a greater role to play,” the survey noted.

The Reserve Bank of India (RBI’s) working group committee had said that the BPLR (basis prime lending rate) system was out of sync with market conditions and does not adequately respond to changes in monetary policy.