Base Rate Regime Requires Fine Tuning - ASSOCHAM

July 18, 2010: The Associated Chambers of Commerce and Industry (ASSOCHAM) has urged the Reserve Bank of India (RBI) to further fine tune base rate regime so that level playing field is also created for all stakeholders in money market and make sure that borrowers are able to access funds with fair, equitable and effective delivery mechanism.

In the present state, the base rate does not cover the fixed interest rate segment, presently under the benchmark prime-lending rate (BPLR) segment. It also does not cover as to how long existing BPLR system will continue, creating anomaly in existing as well as new borrowers. Therefore, there needs to be a sunset clause for the BPLR system.



Banking industry has re-structured and re-habilitated a large number of viable units where concessional rates or even the funding of over-dues have been considered at substantially low rates of interest as enshrined in respective re-habilitation policies of banks. The present base rate regime is totally silent and would hit this portfolio and borrowers perceptively.

The existing borrowers having availed loans at fixed rates need to be brought into base rates so that they do not suffer. The purpose of base rate has been to transmit monetary policy action swiftly and adequately. Currently, the base rates are proposed to be reset every quarter irrespective of time and tenure of monetary policy instances of RBI. There needs to be parity in timelines.

There should be similar timelines in addition to banks own policy for resetting the base rate. This will ensure monetary policy transmission without gap.

The present base rate also makes no mention of it’s applicability on non-banking financial companies (NBFCs), Regional Rural Banks (RRBs) and Co-operative Banks which continue to have different set of guidelines, heavily loaded against the borrowers.



The government is the biggest borrower in the market and is often responsible for interest rate swings. The base rate does not appear to cover the government borrowings in the sense that these borrowings are related to the prevailing coupon rates for various government securities or various maturities. The role played by the government while making huge amount of borrowings influences interest rates and base rate regime clarity is needed in this regard.

The present arrangement of banks for funding against letter of credit (LCs) and bill discount which invariably is at substantially reduced rate due to guaranteed payments will be severely affected and therefore, needs to be addressed on priority.

The ASSOCHAM has reiterated that the base rate has to be broad based and widened to address all these issues comprehensively to defeat any distortions in the money market, said ASSOCHAM chief.

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