Greater Flexibility for Banks on Base Rates

Published: 20th January 2015 06:00 AM  |   Last Updated: 20th January 2015 05:18 AM   |  A+A-

MUMBAI: The Reserve Bank of India on Monday  revised its policy on base rates to give banks greater flexibility. Banks will now be permitted to revise the methodology once every three years instead of five years, the Reserve Bank said.

Yet, the RBI is careful to stress that any change in tenor premium will be uniform for all types of loans for a given residual tenor.

Greater.jpgThe base rate methodology can be changed after completion of prescribed period with the approval of their board of directors or asset-liability committee (ALCO). Banks are not permitted to change the methodology during the review cycle.

For calculating the base rate, banks will have the flexibility to calculate cost of funds either on the basis of average cost of funds or on marginal cost of funds or any other methodology in vogue, which is reasonable and

transparent provided it is consistent and made available for supervisory review or scrutiny as and when required, the RBI said.

“Where the card rate for deposits of one or more tenor is the basis, the deposits in the chosen tenor should have the largest share in the deposit base of the bank, it said.

Banks should have a board approved policy delineating the components of spread charged to a customer, the RBI said. It should be ensured that any price differentiation is consistent with bank’s credit pricing policy. A bank’s internal pricing policy must spell out the rationale for, and range of, the spread in the case of a given category of borrower, as also, the delegation of powers in respect of loan pricing.

Any change in tenor premium will be uniform for all types of loans for a given residual tenor.

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