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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.
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.
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