BPLR (Benchmark Prime Lending Rate) interest rate that commercial banks normally charge their most creditworthy

customers. Asset-Liability Management Committee (ALCO) to fix interest rates on Deposits and Advances. Banks are free to fix Benchmark Prime Lending Rate (BPLR) for credit limits over Rs.2 lakh with the approval of their Boards. They must declare the maximum spread over BPLR with the approval of the ALCO/Board for all advances.

1 ) Sub-BPLR lending

For Private banks, the figure was even higher at 83%. Housing, agriculture, and corporate segments were the major beneficiaries of sub-BPLR lending.

2) BPLR failed to respond to the changes in the monetary policy

Base Rate System is for the banks to set a level of minimum interest rates charged while giving out the loans. It was implemented from 1st July, 2010.
It is proposed to be calculated by including the cost of deposits, cost of maintaining the statutory liquidity ratio and cash reserve ratio, cost of running the bank, and profit margin. Current base rate 10.00% - 10.75%

Base rate system will increase transparency in credit pricing and address the shortcomings of the BPLR system.
It will be directly impacted by the monetary measures initiated by the RBI. Small borrowers such as farmers who are close to BPLR rates would get credit at reasonable rates after the introduction of base rate.

Large corporations that earlier utilised their negotiating power and bargained with banks in order to obtain loans at sub-BPLR rates, could find it difficult due to the minimum rate fixed by banks.

Large banks that have higher percentage of low cost deposits and better operating efficiency will have a lower base rate and thus they will be able to price their loan products competitively. Small banks on the other hand will face problems in extending credit to large corporate.

The Reserve Bank announced the constitution of the Working Group on Benchmark Prime Lending Rate (BPLR) in the Annual Policy Statement of 2009-10 (Chairman: ShriDeepak Mohanty) to review the BPLR system and suggest changes to make credit pricingmore transparent.

Need to Replace the Present BPLR System with the Base Rate System
Sub-Base Rate Lending to be Allowed within Limits Categories to be Excluded from the Base Rate (a) loans relating to selective credit control (b) credit card receivables (c) loans to banks own employees Dissemination of the Base Rate and Range of Actual Lending Rates

Scrupulous Adhering to the Two Codes Prescribed by BCSBI

Benchmarks for Floating Rate Loans in the Retail Segment Administered Lending Rates for Small Loans up to Rs. 2 lakh to be Deregulated

Credit to Exporters to be Extended at the Base Rate

Education Loans to be Provided at Rates not Exceeding Base Rate Plus 200 Basis Points

Subprime loans are mortgages given to borrowers with less than perfect credit or poor credit history Most subprime borrowers are ones with low and inconsistent income Because subprime loans are riskier, they carry a higher rate of interest

Not all subprime mortgage loans were used for buying houses but to refinance other obligations like credit card debts

The bankers who originated subprime loans converted them to bundles of securities and sold the packaged Mortgage Backed Securities (MBS) in financial markets. This allowed banks to pass on the risk of default to investors of MBS. This allowed banks to get these loans off their balance sheet and borrow more, only to originate more subprime loans.

The buyers of these subprime MBS thought they were taking a calculated risk of default in lieu of higher returns.

Capital Outflow
Impact on stock and forex market Impact on the Indian Banking System Impact on Industrial Sector and Export Prospect Impact on Employment

The subprime loan crisis in the US has taken its first toll in India with ICICI Bank's profit taking a hit of more than Rs 1,050 crore ($264 million) in 2007-08.
While the disclosure was made in Parliament on Tuesday, the bank said it had neither invested directly in the USD market nor taken an exposure in the US subprime loan market. ICICI lost money due to depreciation in the value of securities it bought in the international markets. Due to a rise in global interest rates after the subprime loan crisis, the value of these securities fell, forcing the bank to provide for the difference from its profits. The loss, however, is notional since the bank has not actually sold these securities.

Sound banking practices

Controlled derivatives market Limited investment by Indian companies abroad Financial institutions cant afford to be shortsighted Failure to anticipate impact

A low initial interest rate on an adjustable-rate mortgage to entice borrowers, that is later eliminated and replaced by a market-level rate.
From April 1 to September 25, 2010 housing credit increased by Rs.16,195 crore as compared to Rs.7,891 crore. During the five-month period (from April to August) net credit provided by housing finance companies also rose by Rs.7,519 crore compared with Rs.3,581 crore during the six months stretching from April to September 2009. Technique used by bank t expand this market was offering loans at teaser interest rates.

 Under the SBI Easy Home Loan

scheme, where the bank was offering loans up to Rs 30 lakh, the interest rate was fixed at 8% in the first year and 9% for the next two years. For home loans above Rs 30 lakh, the SBI Advantage Home Loan scheme offered 8% fixed rate of interest for the first year and 9.5 % for the next two years. From the fourth year, the interest rates on these loans were linked to the banks benchmark prime lending rate.

Borrowers may find it difficult to service the loans once the normal interest rate, which is higher than the rate applicable in the initial years.
Banks at the time of initial loan appraisal, do not take into account the repaying capacity of the borrower at normal lending rates. The RBI's advice to banks to withdraw teaser home loans was to avoid any sub-prime crisis.

It put a ceiling of 80 per cent on the Loan to Value (LTV) ratio, which reduces leverage by requiring borrowers to commit their own equity to the extent of at least 20 per cent of the value of the asset at the very beginning.
It had decided to raise the average risk weight associated with larger housing loans.

RBI decided to increase the provisioning required for these assets categorised as standard assets from 0.4 per cent to 2 per cent.