Saturday, October 31, 2009

New paradigm for lending rates

Banks don't seem to get their pricing of loans right- and not just banks in India. In India, the RBI has had in place norms for computation of the BPLR since 2003. But this has given risen to several distortion: sub-prime lending is rife (70% of all loans), borrowers grumble about lack of transparency and lending rates rise quickly when policy rates rise but are sticky in the downward direction.

The RBI constituted a working group on BPLR last June, of which I was a member. The group submitted its report on October 20. I have brief exposition of our approach in my ET column.


Bertie said...

Hi Sir,

I think the recommendations are very relevant. The PLR mechanism hasn't really worked especially in ensuring any sort of transparency in loan pricing for borrowers.

In this respect the base rate will somewhat ensure the same.

I have one question regarding the base rate - will it released and made publicly available (say on the RBI website) everyday?

Put another way - how frequently do you foresee banks change the base rate (surely more than the PLR) - especially the foreign banks who might depend more on the money market borrowings for cost of funds to a greater extent than deposits.

T T Ram Mohan said...


1. Banks are supposed to review their base rate and announce the base rate as well as their maximum and minimum lending rate at least once every quarter.RBI website should carry it.

2. The base rate should change whenever the policy rate changes as it will be linked to one year deposit rate. It won't be influenced by money market borrowings as this item is not part of the computation. Short-term lending driven by such borrowings has been exempted from base rate regime.


gopi kumar v said...


the report of the working group mentions about the Unallocatable overhead cost. pls clarify the working of the 0.99% figure which is shown on the illustrative example. as per the formula given

Total unallocated OH cost = 1cr

Total deposit = 100 cr

Deposits available for deployment=71 crs

unallocate OH as % of deployed funds = 0.99%.

But as per formula it should be = 1/71*100 = 1.4%.

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