As RBI talks of the shift to base rate for retail lending, Banks not too surprisingly look for Sunset** until next year.
The Base Rate regime is a noble and internationally used interest regime introduced by RBI for retail lending for banks w.e.f. July 1, 2010… the base rate is arrived vide a set formula that takes into account the cost of lending and cost of operations of the banks vis-à-vis the arbit [so believed] erstwhile BPLR [Benchmark Prime Lending Rate].
BPLR is supposed to be arrived at in a non transparent manner as a lot of determinants were in the unknown to the outsiders, the determinants of the base rate are pseudo public and moreover competitive amongst banking sector players.
Another reason why banks wouldn’t like the base rate is quite a chunk of lending happens at sub-PLR [to an elite group of people/ mostly body corps- ‘aam aadmi’ excluded], but now with the base rate regime, only priority sector lending per monetary policy can borrow at sub-base.
How this affects us: Most of us borrow at BPLR, that would change to base rate, generalizing the outcome, we hope to pay lesser interests that will be more competitive and you’d [almost] know why that’s the number you’re asked to pay.
Downside may be if you’re a part of the ‘sub- PLR’ club or ‘the terms of my loan are too complicated’ club.
Why the sunset….. the banks will have to convince existing @ BPLR borrowers [reality check sub-PLR] to change terms to base rate = loosing/ reshuffling of business for banks. This shift for existing contacts might not come easy and banks’d need time. Plus the rate becomes transparent and cost linked with a capped profit element [Come on…banking is a business and just like any business they are here to make money…. think from the other side of the fence].
Looks like borrowers will continue to borrow [marginally a little less may be to begin with grace à teething issues sunset or not], but all in all, credit will continue to be needed- the predicted growth numbers suggest, that in turn means, need for more deposits i.e. savers in demand…
** P.S:
1. JIC info…. Sunset clauses are restraining/ conditional/ limiting clauses inserted to temporarily alter the applicability of a stat.
2. Exactly when it is thought I’d write about travel this is what i come up with [is why this is called random thots]
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