End of BPLR: RBI to de-regulate lending rates in FY11

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The benchmark prime lending rate (BPLR) may be a thing of the past soon. That is because the Reserve Bank of India (RBI) is all set to de-regulate all lending rates in the next fiscal. Moreover, Mint reports that a base rate is likely to replace the BPLR and no bank will be allowed to offer any loan below the base rate.

The move which may begin in April is likely to see RBI's in-principle nod to the freeing of lending rates for loans to export and farm sector and to small and medium enterprises. The draft circular will be posted on the central bank's website in the next few days and will invite comments from the general public. Mint learns that the savings deposit rates may also be deregulated.

The Mohanty Panel was formed in June last year to review BPLR system. The panel's report was put up on RBI's website in October and had sought comments from the public till November 17.

So, what are the ramifications of such a move? Tamal Bandyopadhyay, Deputy Managing Editor, Mint and TT Rammohan, RBI's BPLR Committee Member, and Professor at IIIM-Ahmedabad delve deeper.

According to CNBC-TV18's Latha Venkatesh there are several problems in what has been mentioned by the RBI. One aspect is if there will be political will to go through all the kind of de-regulating rates for small scale industry and agri.

The de-regulation of savings rate has a huge lobby against it and that is the bankers themselves. If savings rate is de-regulated today or tomorrow morning, she feels the savings rate will go to 5%, as there is a clamour for cheap deposits. She says a lot of private banks will be willing to pay even 5% for that.

She says, while there is liberation in the savings rate, which is very welcome for customers, vested interests will probably not allow it to go through very soon.

Also, on the issue of base rate not being linked to the deposit rate, she fears the base rate implementation could create problems.

Here is a verbatim transcript of the exclusive interview with Tamal Bandyopadhyay and TT Rammohan on CNBC-TV18. Also watch the accompanying video.

Q: Is de-regulation of lending rates the next big reform move in the Indian banking sector? How do you think this will be approached?

Bandyopadhyay: Yes definitely. This is a very significant development and you can call it a reform on whatever you want. The fact is that historically so far lending rates are de-regulated but in quite a few critical segments like export credit and all the so called priority lending which is 40% of bank loan books, they are mandated.

While export credit should be priced at 2.5% less than banks prime lending rate, the other loans to agriculture, to small scale industries, and to the so called weaker sections of the society, which is 40% of banks book, those loans cannot go beyond the banks prime lending rate.

So the RBI is ready to free all these loan rates. So definitely it's a very important, significant happening in the banking space.