India’s central bank ‘Reserve Bank of India’ has introduced new lending rate system to commercial banks in India. It applies to both private and public banks. ‘Base Rate’ is nothing but an interest rate below which the bank should not lend money to its clients. Large customers generally resort to bargaining to avail loans at cheaper rates from banks. From July 1, 2010 onwards banks should not lend money to its clients at rates lower than its declared base rate. RBI wants to ensure that the asset liability management would not be distorted because of cheap barrowing through bargain.
India’s largest lender State Bank of India has set its base rate for loans at 7.5% on Tuesday. Smaller Indian Banks have fallowed it setting their base rates between 7 and 8 percent on Wednesday. State run lenders Indian Bank and IDBI have said they had set their base rate for lending at 8 percent. While private lender Dhanalaxmi Bank set it at 7 percent. Similarly state run Bank of Baroda and Allahabad Bank have fixed their base rates at 8 percent. On Tuesday state run Punjab National Bank and private lender Bank of Rajasthan have announced that their base rates were fixed at 8 percent.
It is reported by Reuters today that improving business and consumer confidence is bringing back credit demand from corporates and mortgage borrowers in Asia’s third-largest economy. Bank credit in India grew an annual 19.1 percent in early June, according to the RBI’s data, in tune with a rise in business and consumer confidence, from a low of 9.7 percent in October and 16.7 percent at end-March. In this background demand for larger loans can be expected to grow in near future.
It is a common practice for Banks in India that they lend to their larger barrowers at rates lower than their published interest rates. From July 1 onwards they cannot do so as per RBI expectations. One must see whether this new system of ‘base rates’ for lending would work to acquire expected results. In a system where political players, bureaucrats and top echelons of the financial system are intertwined with each other so as to squeeze out their personal interests, one cannot expect any regulatory system can put an end to such squeezes. For every regulation there will be a loop hole to escape for top players.