bplr & base rate

7/31/2019 BPLR & Base Rate

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5/22/12

1) BPLR & Base Rate2) Sub-Prime Lending Crisis3) Teaser Rates Controversy-

Brakes applied by RBI asregards teaser rate.



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BPLR

BPLR (Benchmark Prime Lending Rate) interestrate that commercial banks normally chargetheir most credit-worthy customers.

Asset-Liability Management Committee(ALCO) to fix interest rates on Deposits andAdvances.

Banks are free to fix Benchmark PrimeLending Rate (BPLR) for credit limits over Rs.2

lakh with the approval of their Boards.



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Sub BPLR lending



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CONTD.

2) BPLR failed to respond to the changes inthe monetary policy



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Base rate

Base Rate System is for the banks to seta level of minimum interest rates chargedwhile giving out the loans.

It was implemented from 1st July, 2010.

It is proposed to be calculated byincluding the cost of deposits, cost of maintaining the statutory liquidity ratio

and cash reserve ratio, cost of running the


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Impact of Base rate

Base rate system will increasetransparency in credit pricing and

address the shortcomings of theBPLR system.

It will be directly impacted by themonetary measures initiated by theRBI.



Impact on banks

Large banks that have higherpercentage of low cost deposits and

better operating efficiency will havea lower base rate and thus they willbe able to price their loan productscompetitively.

Small banks on the other hand will

face problems in extending credit tolar e cor orate.



Working group on BPL

The Reserve Bank announced the constitution of the Working Group on Benchmark Prime LendingRate (BPLR) in the Annual Policy Statement of

2009-10 (Chairman: ShriDeepak Mohanty) toreview the BPLR system and suggest changes tomake credit pricingmore transparent.



Recommendations

Need to Replace the Present BPLR Systemwith the Base Rate System

Sub-Base Rate Lending to be Allowedwithin Limits

Categories to be Excluded from the BaseRate

(a) loans relating to selective creditcontrol



CONTD.

Scrupulous Adhering to the TwoCodes Prescribed by BCSBI

Benchmarks for Floating Rate Loansin the Retail Segment

Administered Lending Rates forSmall Loans up to Rs. 2 lakh to be

Deregulated



Sub-Prime Lending Crisis



SUBPRIME MORTGAGE

§ Subprime loans are mortgages given to borrowerswith ‘less than perfect ’ credit or poor credithistory

§ Most subprime borrowers are ones with low andinconsistent income

§ Because subprime loans are riskier, they carry ahigher rate of interest

§ Not all subprime mortgage loans were used for

buying houses but to refinance other obligationslike credit card debts



Sub prime mortgageoriginations



Contd.



Contd.

§ The bankers who originated subprime loansconverted them to bundles of securities andsold the packaged Mortgage BackedSecurities (MBS) in financial markets.

§ This allowed banks to pass on the risk of default to investors of MBS.

§ This allowed banks to get these loans off their balance sheet and borrow more, only to

originate more subprime loans.



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Impact on India

Capital Outflow

Impact on stock and forex market

Impact on the Indian BankingSystem

Impact on Industrial Sector and



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News article EconomicTimes March 5, 2008

The subprime loan crisis in the UShas taken its first toll in India withICICI Bank's profit taking a hit of more than Rs 1,050 crore ($264million) in 2007-08.

While the disclosure was made inParliament on Tuesday, the banksaid it had neither invested directlyin the USD market nor taken an



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Learnings from the crisis

Sound banking practices

Controlled derivatives market

Limited investment by Indian

companies abroad

Financial institutions can’t afford to beshortsi hted

T R t C t B k



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Teaser Rates Controversy – Brakesapplied by RBI as regards TeaserRates



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Teaser rates

A low initial interest rate on anadjustable-rate mortgage to enticeborrowers, that is later eliminatedand replaced by a market-level rate.

From April 1 to September 25, 2010housing credit increased byRs.16,195 crore as compared toRs.7,891 crore.



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Bangalore on January 21. Home loansoffered with teaser interest rates havehigher risk than those with normal

interest rates.• Under the SBI Easy Home Loan

scheme, where the bank was offeringloans up to Rs 30 lakh, the interest ratewas fixed at 8% in the first year and 9%for the next two years.

• For home loans above Rs 30 lakh, theSBI Advantage Home Loan schemeoffered 8% fixed rate of interest for thefirst year and 9.5 % for the next two

years. From the fourth year, the interestrates on these loans were linked to the bank’s benchmark prime lending rate.



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Concerns over teaserrate

Borrowers may find it difficult to servicethe loans once the normal interest rate,which is higher than the rate applicable in

the initial years.

Banks at the time of initial loan appraisal,

do not take into account the repayingcapacity of the borrower at normallending rates.

'



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RBI’s measures

It put a ceiling of 80 per cent on the Loan to Value(LTV) ratio, which reduces leverage by requiringborrowers to commit their own equity to theextent of at least 20 per cent of the value of theasset at the very beginning.

It had decided to raise the average risk weight

associated with larger housing loans.

RBI decided to increase the provisioning requiredfor these assets categorised as standard assetsfrom 0.4 per cent to 2 per cent.



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THANK

YOU

bplr & base rate

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