Banks all over the globe have been clearly avoiding the public gaze till very recently, whether it is for presenting its balance sheet, cost of funds, interest mechanism, handling of bad debts, and similar crucial aspects of their operations. This has been 100% true of Indian banks. NPA of Banks published or otherwise is incorrect and profit is padded up profits, and the growth of deposits is not transparently projected by all Banks. Gold loan is projected as priority sector advance for agriculture by taking a piece of paper wherein the borrower states he is an agriculturalist and has 5 cents of land! Cars loans and building loans, which are loans having high collateral security are stated to be amongst the public loans which has grown year after year plummeting the profit yield of Banks.
Whenever a new guideline for transparency come from RBI, the public hopes for more benefits such as increase in deposit rates, reduction in the rate of borrowings, etc. The home loan buyer is the target group, consisting of a good number of senior citizens. NRI deposits are perennial source of deposits for the Banks. They are the most sought after constituency by the Bank personnel. Credit Card group (salaried employees) is another favoured customer constituency the Bank seeks favour from.
The recent changeover by Banks to the Base Rate has also attracted much enthusiasm among prospective borrowers, and even the existing borrowers. The Base rate now being widely published is the successor to the Prime Lending Rate (PLR) which has been in vogue for over a decade now. Before the PLR came into operation, there used to be a linkage with the Bank Rate or RBI rate. SBI Rate was the prime rate, was an independent rate, not comparable with other Banks’ rates.
Even though PLR was in operation during the last decade, some Banks started lending at sub-PLR to wean fat account from competitator banks. There was unhealthy competition amongst the Banks. For large lenders, the sub PLR was adjusted most favourably. RBI set up the Deepak Mohanty Committee, which came up with the Base rate concept. RBI has announced that with effect from 1 July 2010, all Banks will have a base rate. However, Creditors with a lending rate different from base rate would have that rate, if they do not agree to the base rate, and all new creditors will have base rate. The banks have asked RBI to advise them on this possibility.
As the Base rate is based on Cost of funds of each bank, the liquidity levels after the compliance with statutory requirements like CRR and SLR and pre-tax return on assets, the benefits to borrowers will not be uniform, varying from bank to bank. Banks with less cost of funds and higher return on lending may be able to offer a lower base rate.
The Home loan segment has been charged interest either at fixed or floating rate. Fixed rate may attract a change only when there is a review or at the reset time forming the conditions of Contract between the bank and loanee. For floating rate, a change may come when there is a renewal of the facility. Since the Base rate is reworked every three months, there cannot be modification in the interregnum. The Creditors expectation that Base Rate would be advantageous is a misplaced notion. PLR may be a shade lower than the Base rate. The Base rate depends upon the Credit Policy of RBI announced quarterly. It is ambiguous at this point to say which is better. RBI’s intention, whether good or bad, can be concluded after a gestation.
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