Small Cos to Benefit From New Base Rate Regime, New Base Rate Modal in India, Current Benchmark Prime Lending Rate in India, New Base Rate Will Benefit to Small Companies

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SME Times News Bureau | 14 Jun, 2010
Shifting to the new base rate modal by banks from the current Benchmark Prime Lending Rate (BPLR) would make it easier for small scale companies to raise money through banks, according to a new survey conducted by an industry body among bankers and economists.

"The new system is transparent and the small borrower should be able to 'negotiate the rates' to their advantage," the survey conducted by the Federation of Indian Chambers of Commerce and Industry (FICCI) said.

The FICCI survey added as the base rate of all the banks would be publicly available, companies will be able to compare the rates charged by banks; hence the skill to negotiate will have a greater role to play.

However, according to the survey participants, the new base rate regime will make raising money through banks costlier for highly rated companies.

As per the recommendations of the Working Group on BPLR, the Reserve Bank of India (RBI) has decided that banks switch over to the system of Base Rate with effect from July 1. But banks are free till December 31 to choose the parameter using which the benchmark rate will be computed.

The working group had viewed that banks' switch over to the system of Base Rate from BPLR, which has tended to be out of sync with market conditions and does not adequately respond to changes in monetary policy, will bring transparency to lending rates and enabling better assessment of transmission of monetary policy.

Also, the Base Rate methodology does allow banks to charge borrowers Base Rate plus borrower-specific charges, which will include product-specific operating costs, credit risk premium and tenor premium.

Besides, the working group had added, concessions are made in certain cases like education loans, credit to small borrowers (up to Rs. 2 lakh), loans below one year, added that working group, which was constituted in the Annual Policy Statement of 2009-10 to review the BPLR system.

Majority of the bankers and economists surveyed by FICCI expressed the feeling that there is a high probability of a ‘slight’ upward bias as far as lending rates are concerned.

"However, the degree of impact will differ from borrower to borrower and across sectors. While an upward pressure on rates for corporates availing at ultra-low rate is imminent, the retail, priority and SME (Small and Medium Enterprises) products will most-likely be able to get a relatively lower rate," the stated, adding that irrespective of the category, borrowers with better credit rating will be able to negotiate a good deal for themselves.

According to the survey, apart from the base rate, other important determinants of future lending rates will be RBI's monetary policy stance and pick-up in credit demand.

While the bankers are optimistic about the credit demand, they are apprehensive of monetary policy. If the policy indicates further tightening there could be a consequent squeeze on liquidity, which will have an upward bias on base rate.

With the new base rate regime, the FICCI survey adds, public sector banks will have an edge over private sector banks in offering a more competitive rate as they have a larger deposit base which gives them access to cheaper sources of stable financing.