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Base Rate vs BPLR in India
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What is BPLR ? Meaning of BPLR ? Define BPLR. What does BPLR stands for in banking?
In banking parlance, the BPLR means the Benchmark Prime Lending Rate. However, with the introduction of Base Rate (explained below), BPLR has now lost its importance and is made applicable normally only on the loans which have been sanctioned before the introduction of Base Rate (i.e. July 2010).
The BPLR system, introduced in 2003, fell short of its original objective of bringing transparency to lending rates. This was mainly because under the BPLR system, banks could lend below BPLR. For the same reason, it was also difficult to assess the transmission of policy rates of the Reserve Bank to lending rates of banks
Thus, BPLR was / is the interest rate that commercial banks normally charge (or we can say they were expected to charge) their most credit-worthy customers. [ Although as per Reserve Bank of India rules, Banks were free to fix Benchmark Prime Lending Rate (BPLR) for credit limits over Rs.2 lakh with the approval of their respective Boards yet BPLR was to be declared and made uniformly applicable at all the branches. The Asset-Liability Management Committee (ALCO) of respective bank fixed interest rates on Deposits and Advances, subject to their reporting to the Board immediately thereafter. The banks were also to declare the maximum spread over BPLR with the approval of the ALCO/Board for all advances ]
What is Base Rate ? Define Base Rate. Meaning of Base Rate ? Which categories of loans are exempted from Base Rate ?
The Base Rate is the minimum interest rate of a Bank below which it cannot lend, except in cases allowed by RBI. Ads by Google
There can be only one Base Rate for each bank. However, banks have the freedom to choose any benchmark to arrive at a single Base Rate but the same needs to disclosed transparently.
As per RBI guidelines (as in July 2012), the following categories of loans could be priced without reference to Base Rate :-
(a) DRI Advances; (b) Loans to banks' own employees including retired employees; (c) Loans to banks' depositors against their own deposits
Base Rate Guidelines for Restructured Loans :
In case of restructured loans, if some of the WCTL, FITL etc needs to be granted below the Base Rate for the purpose of viability, and there are recompense etc. caluses, such lending will not be constructed as a violation of the Base Rate guidelines.
What are the Guidelines for applicability of Base Rate where subvention or Refinance is available :
Cases Where Subvention is Available
(i) Interest Rate Subvention on Crop Loans :
(ii) Interest Rate Subvention on Export Credit
Interest rates applicable for all tenors of rupee export credit advances will be at or above the Base Rate. In respect of cases where subvention of Government of India is available, banks will have to reduce the interest rate chargeable to exporters as per Base Rate system by the amount of subvention available. If, as a consequence, the interest rate charged to exporters goes below the Base Rate, such lending will not be construed a violation of the Base Rate guidelines.
Cases where Refinance Is Available :
(a) Financing of Off-Grid and Decentralised Solar applications Government of India, Ministry of New and Renewable Energy (MNRE) has formulated a scheme on financing of Off-Grid and Decentralised Solar (Photovoltaic and Thermal) applications as part of the Jawaharlal Nehru National Solar Mission (JNNSM). Under the scheme, banks may extend subsidized loans to entrepreneurs at interest rates not exceeding five percent, where refinance of two percent from Government of India is available. Such lending at interest rates not exceeding five percent per annum where refinance of Government of India is available, would not be considered a violation of our Base Rate Guidelines.
(b) Extending financial assistance under Micro Credit scheme of National Scheduled Tribes Finance and Development Corporation (NSTFDC) and various schemes of National Handicapped Finance and Development Corporation (NHFDC) : Banks may charge interest at the rates prescribed under the schemes of NSTFDC /NHFDC to the extent refinance is available. Such lending, even if it is below the Base Rate, would not be considered a violation of our Base Rate Guidelines. Interest rate charged on the part not covered under refinance should not be below Base Rate.
(c) Extending financial assistance under schemes of National Safai Karmacharis Finance & Development Corporation (NSKFDC) : Banks may charge interest at the rates prescribed under the schemes of National Safai Karmacharis Finance & Development Corporation (NSKFDC) to the extent refinance is available. Such lending, even if it is below the Base Rate, would not be considered as a violation of our Base Rate Guidelines. Interest rate charged on the part not covered under refinance should not be below Base Rate.
(d) Lending to Primary Agricultural Credit Societies (PACS) : Banks financing Primary Agricultural Credit Societies (PACS) for short term seasonal agricultural operations may lend below their Base Rate to the extent refinance is available from NABARD. However, when banks use their own funds, they are not allowed to lend below Base Rate
Base Rate - BPLR Differeences ?
The Reserve Bank of India (RBI) committee on reviewing the benchmark prime lending rate (BPLR) recommended that the BPLR nomenclature be scrapped and a new benchmark rate — known as Base Rate — should replace it. Base Rate is much more transparent and banks are not allowed to lend below the base rate (except for cases specified by RBI and given above). Base Rate is to be reviewed by the respective banks at least on quarterly basis and the same is to be disclosed publicly. Moreover, the calculations of BPLR was mostly NOT transparent and banks were frequently lending below the BPLR to their prime borrowers and also under pressure due to various reasons.
When was the Base Rate Made Applicable for Banks in India ? To whom the Base Rate is applicable now ?
RBI had made it mandatory for all banks to introduce Base Rate wef 1st July, 2010. Base Rate system is applicable to all new loans and for those old loans that come up for renewal after July 2010. Existing loans based on the BPLR system may run till their maturity. In case existing borrowers want to switch to the new system, before expiry of the existing contracts, an option may be given to them, on mutually agreed terms
As per RBI guidelines (as in July 2012), the following categories of loans could be priced without reference to Base Rate :-
(a) DRI Advances; (b) Loans to banks' own employees including retired employees; (c) Loans to banks' depositors against their own deposits
Do RBI fixes Base Rate ? Who fixes Base Rate ? How do the Banks arrive at BPLR and How is now Base Rate calculated?
Remember, RBI does NOT fix the base rate. It has issued broad guidelines to bank as to how they should arrive at the base rate. Thus, individual bank itself fixes its own base rate. The calculations of the BPLR by various banks was not transparent. In case of BPLR, Banks normally used to take into consideration the factors like cost of funds, administrative costs and a margin over it. However, such parameters were neither disclosed by banks nor were same for all the banks.
The Base Rate calculations include all those cost elements which can be clearly identified and are common across borrowers. The constituents of the Base Rate includes (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).
Click Here For : Illustrative Methodology for the Computation of the Base Rate
Why Banks are still continuing with BPLR whereas Base Rate has been made Applicable :
Although RBI has introduced Base Rate as a reference benchmark rate for all floating rate loan products wef 1st July, 2010, yet RBI has allowed to continue until maturity, according the same interest rate methodology at which they were approved. Existing borrowers will have the option of approaching the bank to switch to the base rate system before the expiry of their loans.
Do all banks have common Base Rate ?
No, each bank will arrive at its own base rate
What is the Rate of Interest in Case of Consortium Loans where banks have different Base Rates :
Banks need not charge a uniform rate of interest under a consortium arrangement. Each member bank may charge a rat of interest on the portion of the credit limits extended by it to the borrower, subject to the condition that such rate of interest is determined with reference to its Base Rate.
Latest Base Rates of Some Major Banks in India : (click the links given below)
How often the Base Rate will be changed by Banks ?
Banks are required to review the base rate at least once every quarter. Banks can review the same even more than once a quarter. After review, the Bank may decide to change or continue the same base rate.
Whether BPLR was 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 took place for several 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, 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, when the years 2008 and 2009, RBI reduced its its benchmark lending rate by 425 basis points in the, 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 were 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 was the Working Group on BPLR? Who was 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 were the main recommendations of the BPLR group ?
The main recommendations of the Group were
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