Base rate methodology: Banks seek extension from RBI

Banks want more time to figure out on which rate they will calculate their base rate. Last April the Reserve Bank of India had directed banks to shift to the base rate or minimum lending rate mechanism from the earlier BPLR regime. The base rate is to be calculated as the cost of deposits plus other bank running expenses. Now, after one year of the base rate coming into existence, banks are not able to make a decision and want more time, reports CNBC-TV18's Vidhi Godiawala quoting sources.

The RBI gave banks in additional six months time till July 2011 to adopt the methodology for calculating their base rate. Sources say that the Indian Banks Association (IBA) has written to the RBI seeking further extension to fine-tune this methodology of compounding the base rate.
According to bankers, the key challenge is to figure out, which is the correct reference rate to calculate the cost of funds. Currently most banks are going with three months, six months or one year deposit rate as the reference rate and to this the banks add their banks overhead costs and arrived at that base rate.
Bankers say that they have tested the base rate mechanism in a rising interest rate environment; however, they are not sure if this would work in a falling interest rate scenario. Bankers say that they need to test the base rate mechanism even in a falling interest rate regime to get a clearer picture. Tthe bankers also added that inflation and tight liquidity have complicated the understanding of the mechanics of the reference rate.
So the request has been made form the banker