What is BPLR ? What does BPLR stands for in banking? What is the full form of
BPLR? What is Benchmark Prime Lending Rate?
In banking parlance, the BPLR means the Benchmark Prime Lending Rate. BPLR is
the interest rate that commercial banks normally charge (or we can say they are
expected to charge) their most credit-worthy customers. Although as per Reserve
Bank of India rules, Banks are free to fix Benchmark Prime Lending Rate (BPLR)
for credit limits over Rs.2 lakh with the approval of their respective Boards
yet BPLR has to be declared and made uniformly applicable at all the branches.
The banks may authorize their Asset-Liability Management Committee (ALCO) to fix
interest rates on Deposits and Advances, subject to their reporting to the Board
immediately thereafter. The banks should also declare the maximum spread over
BPLR with the approval of the ALCO/Board for all advances.
Whether BPLR is a
good benchmark for fixing pricing of the loans?
For a long time,
this has been debatable question. The BPLR varied from Bank to Bank. Moreover,
the variation was quite wide, stretching over 4% sometimes. Therefore, a lot of
debate has been going for last few years to replace the same with a new
benchmark. The Working Group set up on Benchmark Price Lending Rate (BPLR)in
its report submitted in October, 2009, has also strongly felt that “The BPLR
has tended to be out of sync with market conditions and does not adequately
respond to changes in monetary policy. In addition, the tendency of banks to
lend at sub-BPLR rates on a large scale raises concerns of transparency…..On
account of competitive pressures, banks were lending at rates which did not make
much commercial sense” Therefore, the Group was of the view that the extant
benchmark prime lending rate (BPLR) system has fallen short of expectations in
its original intent of enhancing transparency in lending rates charged by banks
and needs to be modified.
Why RBI wanted to
replace the existing system of BPLR? What prompted RBI to set up Working Group
for review of BPLR?
While initiating the move to replace
the existing system of BPLR, RBI felt that the existing lending rate system had
lost relevance and hindered effective transmission of monetary policy signals.
For example, RBI reduced its its benchmark lending rate by 425 basis points in
the last one year, but banks reduced their BPLR by about 200 basis point cut.
This was mainly because bulk of their lending was below their BPLR. Although,
prime rates (read BPLR) of Indian banks ranged between 11 percent and 15.75
percent, yet three-fourths of their total loans are made below these levels
because of competitive pressures in the fragmented banking sector.
The panel said while market
conditions may necessitate lending below the base rate, the need may be only for
a short term. Besides, to ensure that such lending does not proliferate, it
should not exceed 15 percent
What is Working
Group on BPLR? Who is the Chairman of BPLR Working Group? What were the terms of
reference to the BPLR Group?
The Reserve Bank
announced the constitution of the Working Group on Benchmark Prime Lending Rate
(BPLR) in the Annual Policy Statement of 2009-10 (Chairman: Shri Deepak Mohanty)
to review the BPLR system and suggest changes to make credit pricing more
transparent.
The Working Group
was assigned the following terms of reference (i) to review the concept of BPLR
and the manner of its computation; (ii) to examine the extent of sub-BPLR
lending and the reasons thereof; (iii) to examine the wide divergence in BPLRs
of major banks; (iv) to suggest an appropriate loan pricing system for banks
based on international best practices; (v) to review the administered lending
rates for small loans up to Rs 2 lakh and for exporters; (vi) to suggest
suitable benchmarks for floating rate loans in the retail segment; and (vii)
consider any other issue relating to lending rates of banks.
What are the main
recommendations of the BPLR group ?
The main
recommendations of the Group are
After carefully
examining the various possible options, views of various stakeholders from
industry associations and those received from the public, and international
best practices, the Group is of the view that there is merit in introducing a
system of Base Rate to replace the existing BPLR system.
The proposed
Base Rate will include all those cost elements which can be clearly identified
and are common across borrowers. The constituents of the Base Rate would
include (i) the card interest rate on retail deposit (deposits below Rs. 15
lakh) with one year maturity (adjusted for CASA deposits); (ii) adjustment for
the negative carry in respect of CRR and SLR; (iii) unallocatable overhead
cost for banks which would comprise a minimum set of overhead cost elements;
and (iv) average return on net worth.
The actual
lending rates charged to borrowers would be the Base Rate plus
borrower-specific charges, which will include product-specific operating
costs, credit risk premium and tenor premium.
The Working
Group has worked out an illustrative methodology for computing the base rate
for the banks. According to this methodology with representative data for the
year 2008-09, the illustrative Base Rate works out to 8.55 per cent.
With the
proposed system of Base Rate, there will not be a need for banks to lend below
the Base Rate as the Base Rate represents the bare minimum rate below which it
will not be viable for the banks to lend. The Group, however, also recognises
certain situations when lending below the Base Rate may be necessitated by
market conditions. This may occur when there is a large surplus liquidity in
the system and banks instead of deploying funds in the LAF window of the
Reserve Bank may prefer to lend at rates lower than their respective Base
Rates. The Group is of the view that the need for such lending may arise as an
exception only for very short-term periods. Accordingly, the Base Rate system
recommended by the Group will be applicable for loans with maturity of one
year and above (including all working capital loans).
Banks may give
loans below one year at fixed or floating rates without reference to the Base
Rate. However, in order to ensure that sub-Base Rate lending does not
proliferate, the Group recommends that such sub-Base Rate lending in both the
priority and non-priority sectors in any financial year should not exceed 15
per cent of the incremental lending during the financial year. Of this,
non-priority sector sub-Base Rate lending should not exceed 5 per cent. That
is, the overall sub-Base Rate lending during a financial year should not
exceed 15 per cent of their incremental lending, and banks will be free to
extend entire sub-Base Rate lending of up to 15 per cent to the priority
sector.
At present, at
least ten categories of loans can be priced without reference to BPLR. The
Group recommends that such categories of loans may be linked to the Base Rate
except interest rates on (a) loans relating to selective credit control, (b)
credit card receivables (c) loans to banks’ own employees; and (d) loans under
DRI scheme.
The Base Rate
could also serve as the reference benchmark rate for floating rate loan
products, apart from the other external market benchmark rates.
In order to
increase the flow of credit to small borrowers, administered lending rate for
loans up to Rs. 2 lakh may be deregulated as the experience reveals that
lending rate regulation has dampened the flow of credit to small borrowers and
has imparted downward inflexibility to the BPLRs. Banks should be free to
lend to small borrowers at fixed or floating rates, which would include the
Base Rate and sector-specific operating cost, credit risk premium and tenor
premium as in the case of other borrowers.
The interest
rate on rupee export credit should not exceed the Base Rate of individual
banks. As export credit is of short-term in nature and exporters are generally
wholesale borrowers, there is need to incentivise export credit for exporters
to be globally competitive. By this change in stipulation of pricing of export
credit, exporters can still access rupee export credit at lower rates as the
Base Rate envisaged is expected to be significantly lower than the BPLRs. The
Base Rate based on the methodology suggested by the Group is comparable with
the present lending rate of 9.5 per cent charged by the banks to most
exporters. The proposed system will also be more flexible and competitive.
At present the
interest rates on education loans are linked to ceilings with reference to the
BPLR. In view of the critical role played by education loans in developing
human resource skills, the interest rate on these loans may continue be
administered. However, in view of the fact that the Base Rate is expected to
be significantly lower than BPLR, the Group recommends that there is a need to
change the mark up. Accordingly, the Group recommends that the interest rates
on all education loans may not exceed the average Base Rate of five largest
banks plus 200 basis points. Even with this stipulation, the actual lending
rates for education loans would be lower than the current rates prevailing.
The information on the average Base Rate should be disseminated by IBA on a
quarterly basis to enable banks to price their education loan portfolio.
In order to
bring about greater transparency in loan pricing, the banks should continue to
provide the information on lending rates to the Reserve Bank and disseminate
information on the Base Rate. In addition, banks should also provide
information on the actual minimum and maximum interest rates charged to
borrowers.
All banks should
follow the Banking Codes and Standards Board of India (BCSBI) Codes for fair
treatment of customers of banks, viz., the Code of Bank’s Commitment to
Customers (Code) and the Code of Bank’s Commitment to Micro and Small
Enterprises (MSE Code) scrupulously. The Group also recommends that the
Reserve Bank may require banks to publish summary information relating to the
number of complaints and compliance with the codes in their annual reports.
RBI has placed a draft on the website for suggestions by November, 2009. The
final guidelines are expected to be issued by RBI thereafter.
What is the difference between BPLR and Base Rate?
The Reserve Bank
of India (RBI) committee on reviewing the benchmark prime lending rate (BPLR)
has recommended that the BPLR nomenclature be scrapped and a new benchmark rate
— known as Base Rate — should replace it.
How do the Banks arrive at BPLR and How it is proposed to calculate Base Rate?
At
present, the calculation of BPLR by various banks is not transparent. However,
Bank normally take into consideration the factors like cost of funds,
administrative costs and a margin over it. The BPLR of various banks in the
month of October, 2009 ranged between 11 per cent and 16 per cent.
The proposed Base Rate will include all those cost elements which can be clearly
identified and are common across borrowers. The constituents of the Base Rate
would include (i) the card interest rate on retail deposit (deposits below Rs.
15 lakh) with one year maturity (adjusted for CASA deposits); (ii) adjustment
for the negative carry in respect of CRR and SLR; (iii) unallocatable overhead
cost for banks which would comprise a minimum set of overhead cost elements; and
(iv) average return on net After factoring
in costs incurred while sanctioning a loan, the proposed base rate could be as
low as around 8.50% in the current interest rate scenario (October 2009).
