RBI is trying to suggest that instead of "Discount to BPLR", banks should move to "Base Rate"!Banks fix their floating rates on things like home loans at a discount to the benchmark prime lending rate (BPLR).
When rates were cut, the discount would be increased, thereby giving new customers a lower rate, but the BPLR itself would be left untouched more often than not.
Thus, existing customers whose discount rate was already contractually fixed would not benefit.
When rates were hiked, on the other hand, banks would typically leave the discount unchanged and move the BPLR up, thereby ensuring that both new and old customers would pay a higher rate.
The RBI has now put forward a suggestion that the BPLR be done away with altogether.
Instead, it argues, there should be a "base rate", which cannot be fixed arbitrarily as the BPLR was, but would be the sum total of various elements of costs for banks. Since the cost elements are known, they can be monitored.
More importantly, unlike BPLR, banks would have to move the base rate upwards or downwards each time the RBI tweaks monetary policy to increase or decrease their cost of funds.
The RBI has suggested that bank boards should review the base rate every quarter.
To read more, please, visit RBI moves to make loans more transparent
Related Story:Consumer forum orders ICICI Bank to pay a penalty of Rs 1 lakh to the borrower and charge the same rate of interest to old and new home loans
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