impact of shift from prime lending rate to

8/6/2019 Impact of Shift From Prime Lending Rate To

http://slidepdf.com/reader/full/impact-of-shift-from-prime-lending-rate-to 1/30

Litesh Pahuja

Roll no.= 5789

Finance



Content1. Introduction

2. Objectives

3. Data type and Source4. Research Methodology

5. Data Analysis

6. Findings

7. Conclusion

8. Limitations

9. Bibliography



y

What is Base Rate?It is the minimum rate of interest that a bank is allowed to

charge from its customers. RBI rule stipulates that no bank

can offer loans at a rate lower than Base Rate to any of its

customers. Base rate as the name suggest, will be the base

interest rate applicable to the borrowers. Even though

banks are restricted from lending below the Base rate, in

certain situations they can do so, but only for short term

loans.



Components of Base rate:There are four components to calculate Base rate:

1. Cost of Deposits

2. Negative carry on CRR and SLR 3. Overheads cost

4. Return on Net worth.



yEvolution of Interest rate:

The evolution of Interest Rates on loans and advances inIndia can broadly be classified in to two phases viz.Regulated and Deregulated regimes.

1. Regulated Interest Rate Regime:

Till late 1980s, the interest rate structure on loans andadvances extended by commercial banks was largely administered by the RBI and banks did not have any freedom to fix the interest on loan products, irrespective of the nature of advance and the amount lent. Banks weresimply advised to follow the interest rate prescription of RBI, primarily to ensure the flow of adequate credit to thedesired productive sectors of the economy.



2.Deregulated Interest Rate Regime:RBI has initiated a number of steps to simplify andrationalize the complex interest rate structure as wellas to bring in transparency in the loan pricing system.

The important changes in lending rates post reformera are as under:



Evolutions:Year Key changes

Sep 1990 The structure of lending rates was rationalized into six size-wise slabs. The slabs were reduced

to four in the year 1992 and further reduced to three in the year 1993. Of these, banks were

free to set interest rates on loans of over Rs.2 lakh with minimum lending rates prescribed by

RBI.

Oct 1994 Lending rates for loans with credit limits of over Rs.2 lakh deregulated. Banks were required

to declare their Prime lending rates (PLRs).

Feb 1997 Banks were allowed to prescribe separate PLRs and spreads over PLRs, both for loan and cash

credit components.

Oct 1997 For term loans of 3 years and above, separate Prime Term Lending Rates (PTLRs) were

required to be announced by banks.

April 1998 PLR converted as a ceiling rate on loans up to Rs.2 lakh.

April 1999 Tenor-linked Prime Lending Rates (TPLRs) introduced.

Oct 1999 Banks were given flexibility to charge interest rates without reference to the PLR in respect of certain categories of loans/credit.

April 2000 Banks allowed charging fixed/floating rate on their lending for credit limits of over Rs.2 lakh.

April 2001 The PLR ceased to be the floor rate for loans above Rs.2 lakh and banks were allowed to lend

at sub-PLR rate for loans above Rs.2 lakhs.

April 2002 Dissemination of range of interest rates through the Reserve Banks website was introduced.

April 2003 Benchmark PLR (BPLR) system introduced and tenor-linked PLRs discontinued.



PLR Base Rate

� No Transparency on loan

pricing

� Transparency On loan

pricing

� Old benchmark rate � New benchmark rate

� No fixed time of revision of

BPLR

� It needs to be revised

every quarter

Diff erence Between BPLR & Base Rate



Objectives:y Firstly, the present study has been undertaken to understand the

impact of shift from BPLR to base rate.

y Secondly, The Base Rate system is aimed at enhancingtransparency in lending rates of banks and enabling betterassessment of transmission of monetary policy.

Primary Objective:

y To analyze the impact of base rate on Bank¶s cash deposit ratio,

credit deposit ratio.

y To study the banks functions.



y To study how banks calculated interest rate.

y To suggest an Impact of base rate on banks profit.

Secondary Objectives:

y To understand the Base rate over Benchmark Prime Lending

rate.

y It also involves the estimation of base rate according to the RBI

guidelines.

y To understand the current scenario and getting loan with

minimum interest



Data type and Source

PRIMARY DATA:

y Primary data collected from news papers & magazines.

y Data collected from Banks.

y Data obtained from Banks journals.

SECONDARY DATA:

y Data collected from various books and sites.

y Data collected from internet.

y Data collected from Ace Equity.



Research Methodology

y The research undertaken through an analytical andexploratory study to find out the Impact of shift fromPLR to BA SE RATE on the Banks.



Data Analysisy The data collected through various measures will be tabulated

and a number of statistical tests would be applied on that which

may include ratios etc.

y Liquidity Ratio

y Cash Deposit ratio

y Investment Deposit ratio

y Credit Deposit ratio

y CASA% (

Current account and Saving account)

y Asset Quality Ratio

y Net NPA (Funded) to Net Advances (%)



Base rate of banks

16

7.50%State Bank of India

7.75%Corporation BankDevelopmentalCredit BankState Bank of Bikaner & JaipurState Bank of HyderabadState Bank of MysoreState Bank of TravancoreFederal Bank

8.00% Allahabad Bank

Bank of BarodaBank of IndiaCanara BankCentral Bank of India

IDBI BankIndian Bank

Oriental Bank of CommercePunjabNational BankUCO Bank

Union Bank of India

8.25% Andhra BankBank of MaharashtraDena BankIndianO verseas Bank

S yndicate BankUnited Bank of India Vijaya Bank

8.20%

Punjab & Sind Bank

8.75%Karnataka Bank

8.10%South IndianBank

8.50%

Karur Vysya Bank



Public Sector Banks Base Rate BPLR

Allahabad Bank 8.00 12.00

Andhra Bank 8.25 12.00

Bank of 8.00 12.00

Bank of 8.00 12.00

Bank of Maharashtra 8.25 11.25

Canara Bank 8.00 12.00

Central bank of 8.00 12.00

Corporation Bank 7.75 12.00

Dena Bank 8.25 12.50

IDBI Bank 8.00 12.75

Indian Bank 8.00 12.00

Indian Overseas Bank 8.25 12.00

Oriental Bank of Commerce 8.00 12.00

Punjab & Sind Bank 8.20 13.50

Punjab National Bank 8.00 11.00

Syndicate Bank 8.25 12.00

UCO Bank 8.00 12.25

Union Bank of 8.00 11.75

United Bank of 8.00 12.00

Vijaya Bank 8.25 12.25



y Analysis of Base rate and PLR of Banks



y Analysis of SBI Bank:



Findings:

y There are three major players in customer segment who

will get effected-

. Retail

2. Corporate and

3. SME.



Impact on existing loan holders / borrowers:

Even though the base rate is unlikely to have an immediateimpact, it has the potential of significantly reducing your

outflow if the interest rates are reduced in the future. This

is because, the base rate will be revised every quarter and

when interest rates fall, your loan rate will also go down.

Take an example to understand the impact of decrease in

interest rates under the PLR and Base Rate systems.

Assuming that your home loan is for Rs. 25L for 10 years@ 10 percent p.a. Interest rate is PLR plus 200 basis

points.



Year Starting Balance Interest Repaid Principal Repaid Ending Balance

1 25L 2.43L 1.53L 23.47L

2 23.47L 2.27L 1.69L 21.77L

3 21.77L 2.09L 1.87L 19.90L

4 19.90L 1.90L 2.07L 17.83L

5 17.83L 1.68L 2.28L 15.55L

6 15.55L 1.44L 2.52L 13.03L

7 13.03L 1.18L 2.79L 10.24L

8 10.24L 0.89L 3.08L 7.16L

9 7.16L 0.56L 3.40L 3.76L

10 3.76L 0.21L 3.75L NIL

Case 1: PLR is 8 percent at the time of taking the

loan. After two years, the interest rates decline but

PLR is not revised.

Total Interest paid using the PLR:

Rs. 14.65L



Year Starting Balance Interest Repaid Principal Repaid Ending Balance

1 25L 2.43L 1.53L 23.47L

2 23.47L 2.27L 1.69L 21.77L

3 21.77L 1.88L 1.95L 19.82L

4 19.82L 1.70L 2.13L 17.69L

5 17.69L 1.50L 2.33L 15.36L

6 15.36L 1.28L 2.54L 12.82L

7 12.82L 1.04L 2.79L 10.03L

8 10.03L 0.78L 3.05L 6.98L

9 6.98L 0.49L 3.33L 3.65L

10 3.65L 0.18L 3.65L

Case 2: Using Base Rate System. The base rate at the time of taking the loan is 8

percent. It is reduced to 7.0 percent after 2 years. So, the interest rate on the loan

is revised to 9.0 percent.

Total Interest paid using the base rate: Rs. 13.55L

The diff erence between PLR and Base Rate above example 1.05L, so due to change in

interest rate the customer is able to save Rs 1.05L.



Conclusion:

y The Base Rate is nothing but old wine in a new bottle. The concept of a prime lending rate(PLR) for banks was introduced in October 1994 for loans above Rs 2 lakh. It was the rate at

which a bank¶s best or µprime borrowers¶ would get funds. All others would get it at a mark up

above the PLR. And even if a bank gave funds to a firm below its PLR, it only meant that it

was extremely credit worthy: sub-prime lending in India was the exact opposite of what it has

come to mean in the post-financial crisis world in the West. All this also meant that the PLR

lost its meaning; borrowers complained that the declared PLR of a bank meant nothing; you

could get funds below or above it.

However, the base rate system will not be applicable for the following type of loans:

1. Agricultural Loans

2. Loans given to own employees

3. Loans against deposit

4. Export Credit

Base rate system is arrived at taking into the account, the cost of deposits and cost of keeping

aside cash to meet CLR and SLR . It is convenient for the banks to adjust the lending rates

after the changes on policy rates by the RBI.



Main advantages of Base rate system:

y More transparency for customers in knowing about base rate as it is based on cost of funds.

y Stoppage of sub-prime loans to bigger corporate.

y Small and Medium Enterprises (SMEs) may get better rates. TheSMEs and small borrowers are subsidizing the corporate loans.

y Deregulation of interest rates as banks will stop lending at lower rates to loans below Rs 2 lakhs. RBI has given freedom to banks tocharge commercial rates for loans below Rs 2 lakh at rates linked to

base rate. With this, RBI

wants to increase the credit flow to small borrowers.

y Increase in liquidity of banks. As loans are not doled out on sub- prime rates, more money is left with banks.



Suggestions:

y Deregulation will have another major advantage in that it willhelp improve the monetary transmission.

y This (the base rate model) would help more scientific bargainingrather than bargaining without any base.

y This will also ensure that banks can charge their customersaccording to their risk appetite.

y The new system prevents banks to lend below their base rateeven to top-rated clients.

y A borrower will have to pay would be the base rate plus theborrower-specific charges like premium related to maturity of loans.



Bibliographyy www.rbi.comy www.Moneycontrol.comy www.banknet.comy

www.sbi.comy www.pnb.comy www.idbi.comy www.google.co.iny Ace Equity Softwarey

Accounting and Finance for Bankers- H C Aggarwaly Banking and Financey The Base Rate as Primary Tool of Monetary Policy

impact of shift from prime lending rate to

Documents