How will the new system work?
Instead of a variable lending rate determined largely by one's bargaining power, the new system aims for deregulation. This means that big corporates and priority sectors like SMEs and housing will no longer be able to enjoy sub-BPLR rates while the less privileged settle for inflated interest rates. Theoretically, BPLR was meant for the best customers, but due to a lack of transparency in this method, up to 70 per cent of bank loans are currently disbursed at sub-BPLR rates.
A base rate regime is sure to turn the tables. Banks will now have to determine their actual lending rates with reference to a common base rate, irrespective of the category of borrowers. The actual rate will comprise the base rate plus borrower-specific charges like product-wise operating costs, credit risk premium and tenor premium.
Each bank will have its own base rate because the criteria for calculation will include common factors such as profit margin, unallocatable overhead cost for banks and cost of deposits. For instance, as per the formula set by the Deepak Mohanty panel, the base rate for 2008-9 worked out to 8.55 per cent. On the other hand, the BPLRs vary from 11.75-16 per cent depending on the bank.
How will the customers benefit?
The biggest advantage is that loan pricing will become more transparent. Apart from the fact that banks won't be able to arbitrarily price loans, deregulation is likely to increase the credit flow to small borrowers at reasonable interest rates.
Another benefit is that it will mute the cut-throat competition among banks in the long run, which means an end to rate wars. The teaser rate phenomenon is likely to die out since the new base rate would be higher. With price no longer the main differentiator, factors like quality of service and fee structure will come into greater focus. This will make banking more convenient and will also level the playing field for public sector banks and private players. This shall pave the way for a wider choice for your banking needs.
Besides, linking the base rate to deposit cost will also mean that unlike in the past, policy rate changes will be immediately reflected in the banks' lending rates. The existing borrowers too can choose to switch to this new system based on a mutually accepted revised contract.
Are there any possible roadblocks?
It's common knowledge that the sub-BPLR rates enjoyed by priority lending sectors was a move propelled, at least in part, by political will. The new pricing structure might double the applicable interest rates in such cases, a minefield few politicians would want to venture into.
