To introduce greater transparency in pricing of loans given by banks,a Reserve Bank committee today suggested that the benchmark prime lending rate (BPLR) system should be replaced with a base rate mechanism. Under the proposed mechanism,all banks will be required to declare a base rate and charge interest rates over that depending upon the credit profile of the borrower and repayment period. At present,banks fix interest rates on loans with reference to BPLR. The proposed base rate will include all those cost elements which can be clearly identified and are common across borrowers, said the RBI working group report on BPLR. The base rate,it added,would also serve as the reference benchmark rate for floating loan products. The banks,however,will be permitted to lend money below the base rate for loans with a maturity of less than one year or for priority sector advances. Under the current mechanism,many banks lend money below BPLR which does not make business sense. On account of competitive pressures,banks were lending a part of their portfolio at rates which did not make much commercial sense, the working group said.
