Direction (Q. 1-10): Read the passage carefully and answer the questions given below it.
The Reserve Bank of India set up the constitution of the working group on Benchmark Prime Lending Rate (BPLR) in Annual Policy Statement of 2009-10 under the chairmanship of Deepak Mohanty to review the BPLR system and suggest changes to make credit pricing more transparent. The committee submitted its report in October 2009.
Base Rate is the minimum rate of interest that a bank is allowed to charge its customers. It includes all those components of lending rates that are common across all categories ofborrowers. Banks may choose any benchmark to arrive at the base rate for a specific tenure that can be disclosed in a transparent manner. All new loan cases and renewal cases willbe covered underbase rate with effectfrom July 1,2010. As
per RBI rules, no bank can offer loans at a rate below base rate except certain categories such as loans under DRI schemes, loans to bank's own employees, loans to bank depositors against their own deposits, crop loans below `3 lakh for which subvention is available, export credit where subvention is available, restructured loans etc. There are ten such categories.
As per RBI regulations, banks were free to fix BPLR for credit limits over Rs.2 lakh with the approval of their respective Boards. Banks may authorise their Asset Liability Management Committee (ALCO) to fix interest rates on deposits and advances, subject to their reporting to the Board immediately thereafter. Banks should also declare the maximum spread over BPLR with the approval of the ALCO/ Board for all loans and advances.
BPLR varied from one bank to another. Moreover, the variation was quite high, sometimes over 4%. Therefore, need was felt to replace existing BPLR system with a new system. According to the working group set up on BPLR, "The BPLR has tended to be out of sync with market conditions and does not adequately respond to changes in monetary policy. Moreover, there is tendency of banks to lend at sub-BPLR rates on a large scale. Under competitive pressures, banks were lending at rates which did not make much commercial sense." Thus, the group was of the view that BPLR system has fallen short of expectations in its original objective of ensuring transparency in lending rates charged by banks and needs modification.
As per Mohanty report, most of the bank's corporate loans were below BPLR while small borrowers and agriculture loan borrowers paid higher than BPLR rates, thus subsidising high-value borrowers. RBI has now deregulated interest rates. Banks will now charge fixed or floating rates on the basis of base rate that itself will reflect transaction costs and risk perceptions.
All the renewal cases are to be covered under base rate from