BASE RATE METHODOLOGY: NEW MANTRA FOR TRANSPARENCY

While we were still reeling under the after effects of US FED rate cut, RBI gave its own booster shot to the banking sector by announcing the new base rate guidelines. Base rate system was instituted from 1^st July 2010 and all loans & advances were priced only with reference to the base rate. In simple terms, banks could not lend at rates lower than the base rate determined by them. This was done mainly to impart transparency in the whole lending process. But as credit growth faltered and non performing assets mounted, RBI has come up up with this magic formula.

As per the new rule, banks cannot have their own base rate methodologies based on average cost of funds, marginal cost or a blend of both. They have to calculate their base rates based on marginal cost of funds and transmit the repo rate cut benefit to the borrowers. Yes, of course, it will bring uniformity among the banking sector and perhaps also transparency but will it propel growth of banking sector loan book. Credit growth cannot be created by banking sector; it can only manage and be a source of credit. With GST and bankruptcy bill stalled in parliament, may be the RBI is just doing it’s bit.