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The Clear Picture

HE CLEAR PICTURE 
The change to base rate system of lending will bring in more transparency into the loan market, says SHILPA SACHDEV
Come July, the base rates will go on floor and banks will have to decide their actual lending rates using the base rate as a reference. RBI's decision to change from the Benchmark Prime Lending Rate (BPLR) system to Base Rate system comes from the failure of BPLR system to improve transparency in the lending rates charged by the banks.
The BPLR system has been drawing flak from various quarters on account of the larger percentage of loan disbursals made at sub-BPLR rates, which was a bottleneck for establishing transparency.
Under the new regime, the actual lending rates have to adhere to the base rate decided by the bank. Also the lending rates cannot be lower than the base rate. However, according to RBI guidelines, banks will get some time to stabilise to the system of base rate calculation. Banks are permitted to change the benchmark and methodology any time during the initial six month period i.e. till the end of December 2010.
While RBI has given six months to banks to adopt the new system, in the meantime it is expected that the banks would experiment with rates. The bankers are of the opinion that the base rate system may not necessarily change the home loan rates by a great margin although most banks are expecting some upward increase. The old borrowers would not be affected by the change according to RBI guidelines. However, the limited period offer would be affected or could be withdrawn depending on the cost of funds. Most PSU banks are expected to peg their base rate in the range of 8-9%. Private banks could go even lower on their offer depending on their cost of funds.
Prashant P Joshi, Managing Director & Head, Private & Business Clients - India, Deutsche Bank says, "In the current BPLR scenario, banks resisted lowering the PLRs promptly (when rates decreased) but passed the benefits of lower rates to customers by increasing discounts to the PLR. Thus new borrowers benefited but not existing ones who continued to pay at the old/higher interest rates. All categories of loans will now be priced only with reference to the Base Rate. Banks will not be able to lend to large corporates below their cost of funds and hence the individual and SME customers will tend to get increased credit flows.”
Overall, experts believe the move will infuse much-needed transparency in the retail and corporate lending market. As Reserve Bank of India deputy governor Subir Gokarn reportedly explained, the important contribution the base rate will make is that it will make the transmission visible. The borrower will now know exactly why he is being charged the rate that he is, which was not visible in the old system.
Joshi adds, "The sole purpose of the new Base Rate regime is to enhance transparency in lending rates of banks and to enable better assessment of transmission of monetary policy of the RBI. While interest rates may go up marginally the base rate will provide the desired transparency to homebuyers opting for floating rate loans. Hence the new base rate regime should be favourable to homebuyers in the long run. Once the base rate regime stabilises, it is advisable to take a floating rate home loan as compared to fixed rate/teaser rate options as floating rates would be much more transparent than before. Home buyers should opt for banks that have transparency in dealings."
Manju Yagnik, Vice-Chairperson, Nahar Group says, "By introducing the Base Rate system, banks will have flexibility and freedom while deciding on interest rates as long as they are above the base rate. This move is designed to contain inflation and bring in transparency in lending operations. Under the existing system, each Bank announces its Benchmark Prime Lending Rate and advances credit to its customers, depending on their credibility at rates above or below its benchmark rate. Under the Base Rate system, banks will have to adhere to levying interest rates that are not below the base rate, bringing in an element of transparency. There may be a marginal increase in the effective cost of borrowings for some industry sectors."
Yagnik also feels that considering the widening gap between supply and demand for housing as also large options currently available for housing loans, the decision to buy a home need not be governed by introduction of a Base rate system.
"Currently the real estate market, especially the housing segment, is very buoyant, and a large number of banks and financial institutions are competing to advance housing loans with attractive interest rates to home-seekers. According to sources, Banks' NPAs (Non-Performing Assets) on the housing loan front are far lower as compared to other loans, and hence the Banks are focused on advancing loans to housing. It is against this background, we expect a miniscule change in the home loan interest, which will not have any adverse impact on the home-buyer."
Similar is the view of Sanjay Kabra, CFO, Mantri Realty, who says, "This will have a positive effect in the long run; RBI's objective is to rein in the tendency of large borrowers to get away with interest rates at lower rates from BPLR which were not spelt out. The loss ensuing from these transactions were recovered from other borrowers, With this system in place Banks would have to lend at higher rates from the Base rates, which would help rationalise the interest rates for SMEs and the retail borrowers. By similar logic it is expected that the home loan rates would rationalise in the long run, which would be good for the customers and the developers."
Rajesh Shah, Executive Director, Dosti Group says, "The Base Rate system will in fact have a positive impact in the market. Earlier, the banks would devise their own PLR rates and customers never knew the reason for the PLR rates they were being charged. Also, the banks were never answerable. But with the equalisation of base rates across all the segments, the customer will know what he is being charged and on what basis. Also, banks will have to be more open and clear with their transactions, which is a fair move towards the customer."
According to Kaizad Hateria, GM - Resident Sales and Customer Relations, Rustomjee, the move could bring in a marginal increase in the home loan interest rates but it will also enhance the sense of safety and security for the customer. "In the BPLR system, the volatility component is high. Each bank gives its own spread and charges the customer differently. Under the base rate system, there will be more competitiveness in the market. Also, the dealings will be fair and the customer can go with his eyes wide open and choose the best bank suitable to his needs. This will cut down the 'jumping between banks' and bring more stability. The big guys who can work around their cost of funds intelligently will stand to benefit. Also, banks will be stricter in understanding the credit history of the customer. The stricter due diligence will in turn prove good for the health of the economy."
The bankers agree that in the long run this move would be beneficial to the borrowers as base rates would be transparent and the rate fixed would be in accordance. No special favours would be given to any borrowers and the rates would have to be competitive to attract the customers. Focus will have to shift from low interest rates currently, to better customer service and product features to attract customers. It would be a case of too many choices for the customers. And a welcome one indeed!

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UNDER THE NEW REGIME, THE ACTUAL LENDING RATES HAVE TO ADHERE TO THE BASE RATE DECIDED BY THE BANK
THE SWITCH TO BASE RATE WILL MAKE THE TRANSMISSION VISIBLE