Wednesday, August 5, 2015

INTEREST RATES ON ADVANCES




1.                  Introduction
Banks are free to determine the lending rates on the advances as per their Board approved policy subject to the following guidelines:-

2.            PLR/ BPLR System
With effect from April 29, 1998, interest on Credit limit of Rs. 2 lakh and below was not exceed PLR which was available to the best customer of the bank.

In the year 2003, the prescription of minimum lending rate for credit limits of over Rupees two lakh was abolished and banks were given the freedom to fix the lending rates for such credit limits subject to Benchmark Prime Lending Rate (BPLR) and spread guidelines and approval of their Boards. BPLR would be the reference rate for credit Iimits of over Rs. 2 lakh. BPLR continued to be the ceiling rate of interest for advances upto Rs. 2 lakh.

3.                  Base Rate System
All domestic rupee loans sanctioned or renewed after July 1, 2010 should be priced only with reference to the Base Rate. Existing BPLR based loans may run till their maturity. In case existing borrowers want to switch to the new system, an option may be given to them without charging any fee for the switch over.

Computation of Base Rate

There can be only one Base Rate for each bank. Banks may choose any benchmark to arrive at the Base Rate that may be disclosed transparently. Banks are free to use any other methodology provided it is consistent and is made available for supervisory review and scrutiny.

While computing Base Rate, cost of funds can be calculated either on the basis of average cost of funds or on marginal cost of funds or any other methodology, which is reasonable and transparent. Where the basis of calculation is the card rate of deposit in a particular tenor, deposits in the chosen tenor should have the largest share in the deposit base of the bank.


Review of Base Rate

Banks are required to review the Base Rate at least once in a quarter with the approval of the Board or the ALCO. Banks must exhibit their Base Rate at all branches and websites. Banks are further required to provide information on the minimum and maximum lending rates to RBI on a quarterly basis.

Review of Base Rate Methodology

(i)      Banks that have commenced their banking operations in India after September 2, 2013 will be allowed to revise their Base Rate methodology within a year from the date of commencement of their business operations in India.

(ii)      Banks should review the Base Rate methodology after three years from date of its finalization.

(iii)     Banks will, however, not be allowed to change their methodology during the review cycle.

Spread

(i)      Bank’s policy should clearly specify the components of spread charged to a customer.

(ii)     Bank’s internal pricing policy must spell out the rationale and range of the spread. It should also spell out the delegation of powers in respect of loan pricing.

(iii)    The spread charged to should not be increased except where there is deterioration in the credit risk profile of the customer or change in the tenor premium. However, the change in tenor premium will be uniform for all types of loans for a given residual tenor.

(iv)   The guidelines contained in (iii) above are, however, not applicable to loans under consortium/ multiple banking arrangements.

Determining Lending Rates

Banks should determine their lending rates with reference to Base Rate and specific charges considered appropriate. Banks are not permitted to resort to any lending below the Base Rate. Changes in the Base Rate shall be applicable to all existing loans linked to Base Rate, in a transparent and non-discriminatory manner.

Banks would be free to offer all types of loans on fixed as well as floating rates subject to ALM guidelines. The floating rates based on external benchmarks should, be equal to or above the Base Rate at the time of sanction or renewal. Where loans are offered on fixed rate basis, it will continue to remain the same even if the base rate on revision becomes more than the sanctioned fixed rate.

Exemption from Base Rate guidelines


(a)  DRI advances

(b)  loans to banks’ own employees including retired employees

(c)  loans to banks’ depositors against their own deposits

In those cases where subvention is available to borrowers, it is clarified as under:

(i)    Interest Rate Subvention on Crop Loans

a)    In case of crop loans, if the yield to the bank (after including subvention) is lower than the Base Rate, it will not be construed a violation.

b)    The rebate for prompt repayment does not change the yield to the banks, hence it would not be a factor for compliance with the Base Rate guidelines.

(ii)    Interest Rate Subvention on Export Credit

Interest rates applicable for all tenors of rupee export credit advances will be at or above the Base Rate. As a result of subvention, if the interest rate goes below the Base Rate, it will not be considered a violation of the Base Rate guidelines.

Restructured Loans

In case of restructured loans if some of the Working Capital Term Loan (WCTL), Funded Interest Term Loan (FITL), etc. need to be granted below the Base Rate for the purposes of viability and there are recompense etc. clauses, such lending will not be construed a violation of the Base Rate guidelines.

In the following cases where refinance is available, banks are allowed to charge interest at the rates prescribed under the schemes to the extent refinance is available. Such lending, even if it is below the Base Rate, would not be considered a violation. However, interest on the part not covered under refinance should not be below Base Rate.

(a)           Extending subsidized loans to entrepreneurs under the scheme formulated by Government of India, Ministry of New and Renewable Energy (MNRE) on financing of Off-Grid and Decentralised Solar (Photovoltaic and Thermal) aplications

(b)              Extending financial assistance under Micro Credit scheme of National Scheduled Tribes Finance and Development Corporation (NSTFDC) and various schemes of National Handicapped Finance and Development Corporation (NHFDC)

(c)     Extending financial assistance under schemes of National Safai Karmacharis Finance & Development Corporation (NSKFDC)

(d)     Lending to Primary Agricultural Credit Societies (PACS) for short term seasonal agricultural operations where refinance is available from NABARD

(e)     Bank Finance extended to the beneficiaries of the schemes of National Scheduled Caste Finance & Development Corporation (NSFDC)

(f)      Bank Finance extended to the beneficiaries of the schemes of the Indian Renewable Energy Development Agency Limited (IREDA) supported by the National Clean Energy Funds (NCEF)

(g)     Bank finance extended to the beneficiaries of the schemes of National Backward Classes Finance & Development Corporation (NBCFDC)

(h)     Bank finance extended to the beneficiaries of special refinance scheme for flood affected areas of Jammu & Kashmir formulated by National Housing Bank (NHB)

4.          Charging of Interest at Monthly Rests

(i)                Banks have been advised to charge interest on all loans/ advances at monthly rests and the interest charged should be rounded off to the nearest rupee.

(ii)     Charging/compounding interest on agricultural advances should be linked to crop seasons. For long duration crops it would be at annual rests. For short duration crops and allied agricultural activities banks should consider the liquidity of the borrower and harvesting / marketing season. Banks should also ensure that the total interest debited to an account should not exceed the principal amount in respect of short term advances granted to small and marginal farmers.

5.          Differential Rate of Interest for Micro and Small Enterprises (MSEs)
While pricing their loans to MSE borrowers, banks should take into account the incentives available to them and provide differential interest rate for them. However, banks should note that such rate of interest is not below the Base Rate of the bank.

6.            Loans under Consortium Arrangement
Each member of a consortium may charge its own rate of interest on the portion of the loan allocated to them, subject to the condition that such rate is determined with reference to their Base Rate.

7.            Withdrawals Against Uncleared Effects
Interest should not be charged for immediate credit of cheques sent for collection.

8.            Penal Rate of Interest
Banks may formulate their own policy for charging penal interest. However, in case of loans under priority sector, no penal interest is to be charged for loans up to Rs. 25,000. The policy on penal interest should be governed by principles of transparency, fairness, incentive to service the debt and due regard to genuine difficulties of customers.

9.            Zero Percent Interest Finance Schemes for Consumer Durables
Banks should refrain from offering low / zero percent interest rates on consumer durable advances through adjustment of discount available from dealers. Banks should also refrain from linking their names in any manner with any incentive-based advertisement where clarity regarding interest rate is absent.

10.          Excessive Interest Charged by Banks
Banks are advised to lay out appropriate internal principles and procedures so that excessive interest and charges are not levied by them. In laying down such procedures in respect of small value loans, banks should take into account, the following guidelines:

a.    A prior-approval process should be prescribed for sanctioning such loans. Bank should take into account, among others, the cash flow of the borrower.

b.    Interest rates should incorporate risk premium as considered reasonable and justified with regard to the internal rating of the borrower and the availability and value of security.

c.    The total cost to the borrower should be justifiable with respect to the total cost incurred by the bank in extending the loan and the extent of return that could be reasonably expected from the transaction.

d.      An appropriate ceiling should be fixed on the interest and charges that are levied on such loans, which should be suitably publicised.

Based on the Master Circular of 1/7/15. Please visit www.rbi.org.in if required……………      Poppy