Banks find out it pay to remain BPLR loans

Nearly, Three months right after the base rate regime to value loans started, only a handful of clients have shifted to it from the erstwhile benchmark prime lending rate (BPLR) program.

But never blame only lack of buyer awareness. Banks are also locating it more profitable to maintain clients in the BPLR regime. This is simply because the ‘exact mapping’ envisaged by banks has not occurred. Mapping refers to maintaining the efficient interest price intact whilst shifting from BPLR to the base price. For instance, if a client was charged BPLR plus two per cent for working capital loans, assuming a 12 per cent BPLR, in the base rate it would have been base (eight per cent) plus six per cent with mapping.

But this hasn’t happened as bankers fear a hue and cry amongst customers in case high spreads are shown. “No new buyer will come to banks if spreads are shown as higher as 600 basis points (bps), which were 200 bps in the BPLR regime,” mentioned a senior banker from a public sector bank.

What has occurred in some instances is mapping of spreads, instead of the mapping of prices, due to the fact of which powerful interest rates are reduced in the base rate method than in the earlier regime. As a result, according to a senior public sector bank executive, “In some cases, it is not viable for the bank to shift the consumer to a base rate, if spreads are mapped. For example, in case of a client who pays interest linked to BPLR (of ten per cent), he is charged 14 per cent on a term loan, which captures risk, which includes credit threat.”

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Now, if this SME client is shifted to the base rate program, if spreads are intact, the efficient price charged will be 12.five per cent if the base rate is eight.5 per cent. This would mean a dip in interest revenue for the bank, some thing not acceptable at a time earnings development was subdued, he added.

And because, according to norms, each the parties have to agree to such a shift, banks are not interested in shifting the loan to the base rate mechanism, a s spreads will be reduce. As a result, most government-owned banks have observed only ten-20 per cent of the loans shifting to the base rate regime.

“So, as far as operating capital loans are concerned, these are mainly for a year. So, it is far better for us to wait till the contract comes for renewal,” mentioned the chairman and managing director of a mid-sized public sector bank.

In term loans, specially to retail borrowers, it is largely the borrowers who are not prepared to shift, as they discover that the BPLR prices are lower.

Though most banks have implemented one particular round of boost in BPLR, mostly to encourage current borrowers from moving to the base rate, bankers feel another round of BPLR rise is needed to induce term-loan takers into the base rate regime.

The bankers had requested RBI to invoke a sunset clause for all BPLR-linked loans. RBI is studying the legal implications of the clause. This is because specific buyers can move court if the original contract agreement is not honoured.

Working with a WRS Info India Pvt Ltd.

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