Bankers want flexibility in short-term loan pricing

RBI deputy governor Subir Gokarn will meet CEOs of large commercial banks on Friday to finalise the draft circular on base rate — the new system proposed to calculate lending rates. Base rate will be calculated taking into account the cost of deposits, profit margin and establishment cost, among other things. Unlike the benchmark prime lending rate (BPLR), base rate will not factor in the risk element. The risk premium will be mark-up over base rate. Senior bankers told ET that they may seek RBI permission to give some of the short-term loans below the base rate. As per the draft circular, base rate will replace PLR and it will be the minimum rate below which banks can’t lend. The earlier draft by RBI stated that the base rate of most banks is expected to be in the range of 8.5-9.5%. Even if the base rate is in the range of 8-10%, banks fear they may lose business to mutual funds and non-banking finance companies as most corporates will look at cheaper ways of raising money. As of now, PLR of most banks is in the range of 11.75-12.25% and 70% of loans are given below PLR. For instance, banks have given short-term loans (six months to one year) to corporates at rates ranging from 7-10%, depending on borrowers’ risk profile while home loan borrowers are charged between 8% and 10%. Bankers said surplus liquidity in the system and poor demand for loan drove them to lend below PLR. State Bank of India has also suggested that banks should have the flexibility to lend below the base rate to their employees and for loans against fixed deposits. SBI provides home loan to their employees at a simple interest rate of around 6%. Also, it gives loan against FDs at a mark up over the FD rate. In fact, most banks provide loan to employees at much lower rate than their PLR. Banks are likely to ask for more time to implement the base rate system, which, according to the draft note, will come into effect from April 1, 2010. However, RBI deputy governor Usha Thorat recently told the media that the implementation of the base rate could get delayed. Bankers may also seek clarification on cost of deposit calculation. While the earlier draft said the one-year deposit rate should be taken into account to calculate the cost, the second draft just mentioned cost of deposits — thereby giving each bank the option to take average cost of deposits, one-year cost or the incremental cost. Bankers fear this may lead to a distortion in the base rate pricing.