Will the priority sector, which currently draws funds at sub-prime lending rate (sub-PLR), be exempt from the base rate rule?
According to the Reserve Bank of India’s (RBI) draft guidelines, banks will not be allowed to lend below the published interest rate once the system is in place. This will dent lending to the priority sector.
“If the lending rates according to the base rate system apply to priority sector as well, credit offtake might suffer in the next fiscal too,” said RR Nair, director and chief executive of LIC Housing Finance.
“This issue has been put up before RBI, and we are sure that it will be addressed. It is expected that RBI will make sure that priority-sector lending is not affected,” he said.
The RBI had invited suggestions and feedback from bankers on the draft guidelines issued last month.
After meeting bankers and discussing various issues, the RBI pushed the deadline for base rate implementation to July 1, 2010 from April 1, 2010 as proposed in the draft. Final guidelines are expected soon.
JP Morgan analysts Seshadri Sen, Adarsh Parasrampuria and Sunil Garg expect the base rate to be around 8.5%-8.75% for most of the large banks.
It may impact the borrowing costs of non-banking finance companies, especially housing finance firms, the analysts said in a recent report. Currently, the priority sector avails funds at around 6%.
The JP Morgan report said the base rate will be good for banks and bad for borrowers in the short term. It could offset the expected 75 bps increase in savings bank deposits, when implemented.
“It is an interactive process. New rates decided by the banks will have to be seen first,” said P Sitaram, chief financial officer, IDBI Bank.
However, N Sivaraman, executive vice-president of L&T Finance felt base rate implementation will not have a major impact. “Our source of money is diversified, so there won’t be a major impact on the cost of borrowings,” Sivaraman said.
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