BPLR, Benchmark Prime Lending Rate

The BPLR is the interest rate that commercial banks charge their most credit-worthy customers. According to the Reserve Bank of India banks are free to fix the Benchmark Prime Lending Rate (BPLR) with the approval of their respective Boards. Banks are free to decide the BPLR but their interest rates have to have a reference to the BPLR The Benchmark Prime Lending Rate was introduced by the Reserve Bank of India in year 2003 with the aim of introducing transparency and ensuring appropriate pricing of loans, wherein the lending rates truly reflect the actual costs. It was envisaged as a reference rate and was to be computed taking into consideration (i) cost of funds (ii) operational expenses (iii) A minimum margin to cover regulatory requirements of provisioning and capital charge, and profit margin.

Disadvantages of BPLR
1) Non transparency in dealings
RBI has received several representations on the arbitrariness of resetting the lending rates on loans and the benchmark rates used for pricing floating rate products. Many banks charge lending rates with reference to benchmarks which are internal and nontransparent. Additionally, provisions on conditional resetting interest rates are placed as force majeure in loan covenants thereby making the terms of contract non-transparent for the borrower.

2) Downward sticking trend

. Bank base rate is the basic rate of interest on which. the actual rate a bank charges on loans to its customers is calculated. Base Rate The rate of interest used by individual commercial banks as a basis for their lending rates. Base Rate System has many advantages over the older method of Prime Lending Rate. 3) Cross subsidisation in lending A large loan offered to a highly rated borrower may be offered at a lower rate below the current all-in-cost BPLR due to little risk and savings on account of processing and monitoring costs. RBI come up with the new Base Rate system where banks can lend the loans based on the new rating system. While understandable to an extent. The main reason for this is is the large share of deposits contracted at high rates in the past. Base Rate is one of the reforms on banking system by RBI to reduce the lending risk for banks. such sub-BPLR lending on a large scale has created a perception that large borrowers are being cross subsidized by retail and small borrowers. the fixed nature of deposit contracts imply that banks would continue to pay higher interest rates despite the general decline in interest rates. they were slow to bring down the interest rate in the downturn of the interest rate cycle. While reduction of interest rates could lead to repayment or swapping of loans taken by borrowers. Banks have given their existing customers the options to shift their benchmark rate to the base rate.It is a known feature of this scheme that that while banks were often quick in raising lending rates during an upturn in the interest rate cycle.

Banks may determine their actual lending rates on loans and advances with reference to the Base Rate. some of the criteria that could go into the determination of the Base Rate are: 1. It also clearly stipulates that even in cases where the benchmark is an external rate. This would also include charges relating to specific borrowers. The RBI has instructed the banks that the base rate should also be the reference point for products with a floating rate component. cost of printing and stationery. IT spending. and cost incurred towards deposit insurance. legal and premises expenses. Base Rate shall include all those elements of the lending rates that are common across all categories of borrowers. depreciation. Adjustment for the negative carry in respect of CRR and SLR 3. 2. the rate at the time of disbursal of loan should be higher than the base rate. risks involved etc. Unallocatable overhead cost for banks such as aggregate employee compensation relating to administrative functions in corporate office. duration of loan. The variable X will be based on parameters fixed by the banks which could include Operating costs. Profit margin. expenses incurred on communication and advertising. In simpler terms what this means is that instead of depending on the BPLR to decide the rates at which banks lend to borrowers they now will have a more rational reference point to decide the rates. Cost of deposits. All loans given after 01 April 2010 will be calculated as Lending rate = Base rate + X. and 4. . While each bank may decide its own Base Rate. directors and auditors fees.

retail. This was mainly because under the BPLR system. Retail SME and priority sector is likely to benefit with lower rates. fell short of its original objective of bringing transparency to lending rates. The Base Rate system is aimed at enhancing transparency in lending rates of banks and enabling better assessment of transmission of monetary policy. This adoption of the base rate system will bring changes for the banking sector as transparency on product pricing will increase. However. corporate and priority sector.WHY BASE RATE INSTEAD OF BPLR? The BPLR system. SME. Corporates will not be able to raise funds at ultra-low rate and hence will move to other source of funds such as Commercial paper CASA heavy banks will have an advantage as they will have greater headroom to offer lower base rates on account of lower cost of deposit which will be the single most important factor determining the base rate. In order to get a sense of what the impact of base rate implementation could be. Public sector banks will tend to have a lower base rate in comparison to private sector banks by virtue of . Small scale companies with better credit rating will be able to negotiate a good deal for themselves. For the same reason. The impact of this change will be felt across the board. introduced in 2003. Accordingly. FICCI conducted a study on the same. the following guidelines are issued for implementation by banks. it was also difficult to assess the transmission of policy rates of the Reserve Bank to lending rates of banks. the degree of impact will differ from borrower to borrower and across sectors. the highlights of which are: y y y y y Bankers expressed the feeling that there is a high probability of a slight upward bias as far as lending rates are concerned. banks could lend below BPLR.

5 percent margin). risks among other things that will determine the final product cost. The bank has fixed its base rate at 7. they will have to cut their base rates if interest rates in the market fall. When a person shifts to base rate. Also better credit rating will empower the customers to bargain. The borrowers can shift to the base rate from the existing system of PLR. Having said that. it is clear that the new system will benefit retail customers and SME s who were currently cross subsidizing the large corporates. with migration to base rate as the benchmark. the existing borrowers will also be benefited by any cut in the base rate. As all the variable rates of interest are pegged against the base rate. now.5 percent. Implementation of the base rate system does not necessarily mean low rate of interest to customers because banks can load the costs on the other parameters such as operating costs. . which may translate in lower interest rate. The bank says the margin would be adjusted accordingly to maintain the effective current interest rate. Priority sector lending remains the grey area on which RBI is yet to provide clarity. In Base rate system as the banks are supposed to visit their base rates every three months. The base rate is fixed on the basis of various costs that a bank incurs in mobilizing funds and is a more transparent system. the interest is likely to remain the same. it makes sense to renegotiate as well. your rate of interest will continue to be 12 percent (7.having a large deposit base which will give them access to cheaper sources of funds. Assume you have a home loan of Rs 20 lakhs and the current effective rate of interest of 12 percent.5 percent the base rate plus 4. Shifting early to the new benchmark would only help to get the benefits earlier. And if the existing loan rate is around 1-2 per cent lower than your existing rate.

As all the variable rates of interest are pegged against the base rate. banks will have to lower the base rate.In the new base rate system. if the interest rates fall. D = Total Deposits = Term deposits + Current a/c deposits + Savings deposits Dply = Deployable deposits = Total deposits less share of deposits locked in SLR and CRR = D x [1 (CRR + SLR)] CRR = Cash Reserve Ratio SLR = Statutory Liquidity Ratio Tr = 364-day Treasury Bill rate Uc = Unallocatable overhead cost NP = Net profit NW = Net worth = Capital + free reserves . it is advisable for the existing borrowers to opt for the base rate as their benchmark rate. which is a function of cost of funds in the market. the existing borrowers will also be benefited by any cut in the base rate. Therefore. Calculation Of Base Rate Base Rate = a + b + c + d a = cost of deposits/funds = CoD b = Negative carry on CRR and SLR = [{ CoD (SLR x Tr)}/ {1 (CRR + SLR)}] x 100 c = Unallocatable overhead cost = (Uc/ Dply) x 100 d = Average return on net worth = (NP/NW) X (NW/ Dply) x 100 CoD Where.

etc Applicability of Base Rate All categories of loans should henceforth be priced only with reference to the Base Rate.Negative carry on SLR and CRR: At present. The floating interest rate based on external benchmarks should. SLR and CRR carry negative returns for banks. Examples of such overhead costs are: aggregate employee compensation relating to administrative functions in corporate office. directors and auditors fees. . however. depreciation. be equal to or above the Base Rate at the time of sanction or renewal. SLR is 25 per cent and CRR is 6 per cent. cost of printing and stationery. legal and premises expenses. while the return on SLR balance is lower than the cost of deposits. As such. the following categories of loans could be priced without reference to the Base Rate: (a) DRI advances (b) loans to banks own employees (c) loans to banks depositors against their own deposits. which cannot be allocated. CRR balance does not provide any return to banks. apart from external market benchmark rates. Unallocatable Overhead Cost: It is fixed overhead cost consisting of Head Office and Corporate Office costs. The Base Rate could also serve as the reference benchmark rate for floating rate loan products. However. expenses incurred on communication and advertising and IT spending.

separately announce the Review of Base Rate Banks are required to review the Base Rate at least once in a quarter with the approval of the Board or the Asset Liability Management Committees (ALCOs) as per the bank s practice.Changes in the Base Rate shall be applicable in respect of all existing loans linked to the Base Rate. as hitherto. Accordingly. Since transparency in the pricing of lending products has been a key objective. Transitional issues . Since the Base Rate will be the minimum rate for all loans. Banks are required to provide information on the actual minimum and maximum lending rates to the Reserve Bank on a quarterly basis. Reserve Bank of India will stipulation for export credit. banks are not permitted to resort to any lending below the Base Rate. Changes in the Base Rate should also be conveyed to the general public from time to time through appropriate channels. It is expected that the above deregulation of lending rate will increase the credit flow to small borrowers at reasonable rate and direct bank finance will provide effective competition to other forms of high cost credit. the current stipulation of BPLR as the ceiling rate for loans up to Rs. banks are required to exhibit the information on their Base Rate at all branches and also on their websites. in a transparent and non-discriminatory manner. 2 lakh stands withdrawn.

. In line with the above Guidelines. before expiry of the existing contracts.The Base Rate system would be applicable for all new loans and for those old loans that come up for renewal. on mutually agreed terms. however. should not charge any fee for such switch-over. an option may be given to them. In case existing borrowers want to switch to the new system. Existing loans based on the BPLR system may run till their maturity. banks may announce their Base Rates after seeking approval from their respective ALCOs/ Boards. Banks.