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Tuesday, January 20, 2015

RBI issues additional guidelines on Base Rate for banks

The RBI on Monday said the spread (or the mark up over the base rate) charged to an existing borrower by banks should not be increased except on account of deterioration in the credit risk profile of the customer or change in the tenor premium.

What this means is that if the credit rating of an existing borrowing unit deteriorates then at the time of the annual renewal of loan limit , the spread charged over the base rate will be increased. Otherwise the interest rate remains unchanged.

In its additional guidelines on ‘Interest Rates on Advances’, the RBI also allowed banks to review the Base Rate methodology after three years from the date of its finalization instead of the current periodicity of five years. This is to provide banks greater operational flexibility to them.

Base rate is the minimum interest rate below which a bank will not lend. The Base Rate system was introduced with effect from July 1, 2010 to enhance transparency in lending rates of banks and enable better assessment of transmission of monetary policy.

Any decision regarding change in spread on account of change in credit risk profile should be supported by a full-fledged risk profile review of the customer, the RBI said.

The change in tenor premium should not be borrower specific or loan class specific. In other words, the change in tenor premium will be uniform for all types of loans for a given residual tenor.

Banks, according to the RBI, should have a Board approved policy delineating the components of spread (mark up over the base rate) charged to a customer. Further, it should be ensured that any price differentiation is consistent with bank’s credit pricing policy.

Bank’s internal pricing policy must spell out the rationale for, and range of, the spread in the case of a given category of borrower, as also, the delegation of powers in respect of loan pricing. The rationale of the policy should be available for supervisory review.

Source : Thehindubusinessline


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