BPLR out, base rate in
In its annual policy in April 2009, the RBI had admitted that the system of Benchmark Prime Lending Rate (BPLR) has lost its relevance as a meaningful reference rate as the bulk of loans is priced below BPLR.
Print Edition: Nov 01, 2009
In its annual policy in April 2009, the RBI had admitted that the system of Benchmark Prime Lending Rate (BPLR) has lost its relevance as a meaningful reference rate as the bulk of loans is priced below BPLR. In its place a new base rate could soon be introduced.
The concept of BPLR was introduced in November 2003 for pricing of loans by commercial banks with the objective of bringing in transparency in corporate, home, auto and other loans. The rate included the cost of funds (deposits), operating expenses and a profit margin.
So, what is the problem? The majority of banks’ lending is taking place below the BPLR set by them. To solve this problem, one option the RBI is considering is to replace BPLR with a new base rate. Today, the bulk of lending is linked to a floating rate where the bank has freedom to reset the interest rate as and when the environment changes.
A change could mean adopting a method similar to the LIBOR rate, or the London Inter-bank Offered Rate, as a benchmark for pricing floating rate loans. This method is currently used by many countries.
The concept of BPLR was introduced in November 2003 for pricing of loans by commercial banks with the objective of bringing in transparency in corporate, home, auto and other loans. The rate included the cost of funds (deposits), operating expenses and a profit margin.
So, what is the problem? The majority of banks’ lending is taking place below the BPLR set by them. To solve this problem, one option the RBI is considering is to replace BPLR with a new base rate. Today, the bulk of lending is linked to a floating rate where the bank has freedom to reset the interest rate as and when the environment changes.
A change could mean adopting a method similar to the LIBOR rate, or the London Inter-bank Offered Rate, as a benchmark for pricing floating rate loans. This method is currently used by many countries.
