bplr & base rate
TRANSCRIPT
7/31/2019 BPLR & Base Rate
http://slidepdf.com/reader/full/bplr-base-rate 1/25
5/22/12
1) BPLR & Base Rate2) Sub-Prime Lending Crisis3) Teaser Rates Controversy-
Brakes applied by RBI asregards teaser rate.
7/31/2019 BPLR & Base Rate
http://slidepdf.com/reader/full/bplr-base-rate 2/25
5/22/12
BPLR
BPLR (Benchmark Prime Lending Rate) interestrate that commercial banks normally chargetheir most credit-worthy customers.
Asset-Liability Management Committee(ALCO) to fix interest rates on Deposits andAdvances.
Banks are free to fix Benchmark PrimeLending Rate (BPLR) for credit limits over Rs.2
lakh with the approval of their Boards.
7/31/2019 BPLR & Base Rate
http://slidepdf.com/reader/full/bplr-base-rate 3/25
7/31/2019 BPLR & Base Rate
http://slidepdf.com/reader/full/bplr-base-rate 4/25
5/22/12
Sub BPLR lending
7/31/2019 BPLR & Base Rate
http://slidepdf.com/reader/full/bplr-base-rate 5/25
5/22/12
CONTD.
2) BPLR failed to respond to the changes inthe monetary policy
7/31/2019 BPLR & Base Rate
http://slidepdf.com/reader/full/bplr-base-rate 6/25
5/22/12
Base rate
Base Rate System is for the banks to seta level of minimum interest rates chargedwhile giving out the loans.
It was implemented from 1st July, 2010.
It is proposed to be calculated byincluding the cost of deposits, cost of maintaining the statutory liquidity ratio
and cash reserve ratio, cost of running the
7/31/2019 BPLR & Base Rate
http://slidepdf.com/reader/full/bplr-base-rate 7/255/22/12
Impact of Base rate
Base rate system will increasetransparency in credit pricing and
address the shortcomings of theBPLR system.
It will be directly impacted by themonetary measures initiated by theRBI.
7/31/2019 BPLR & Base Rate
http://slidepdf.com/reader/full/bplr-base-rate 8/255/22/12
Impact on banks
Large banks that have higherpercentage of low cost deposits and
better operating efficiency will havea lower base rate and thus they willbe able to price their loan productscompetitively.
Small banks on the other hand will
face problems in extending credit tolar e cor orate.
7/31/2019 BPLR & Base Rate
http://slidepdf.com/reader/full/bplr-base-rate 9/255/22/12
Working group on BPL
The Reserve Bank announced the constitution of the Working Group on Benchmark Prime LendingRate (BPLR) in the Annual Policy Statement of
2009-10 (Chairman: ShriDeepak Mohanty) toreview the BPLR system and suggest changes tomake credit pricingmore transparent.
7/31/2019 BPLR & Base Rate
http://slidepdf.com/reader/full/bplr-base-rate 10/255/22/12
Recommendations
Need to Replace the Present BPLR Systemwith the Base Rate System
Sub-Base Rate Lending to be Allowedwithin Limits
Categories to be Excluded from the BaseRate
(a) loans relating to selective creditcontrol
7/31/2019 BPLR & Base Rate
http://slidepdf.com/reader/full/bplr-base-rate 11/255/22/12
CONTD.
Scrupulous Adhering to the TwoCodes Prescribed by BCSBI
Benchmarks for Floating Rate Loansin the Retail Segment
Administered Lending Rates forSmall Loans up to Rs. 2 lakh to be
Deregulated
7/31/2019 BPLR & Base Rate
http://slidepdf.com/reader/full/bplr-base-rate 12/255/22/12
Sub-Prime Lending Crisis
7/31/2019 BPLR & Base Rate
http://slidepdf.com/reader/full/bplr-base-rate 13/255/22/12
SUBPRIME MORTGAGE
§ Subprime loans are mortgages given to borrowerswith ‘less than perfect ’ credit or poor credithistory
§ Most subprime borrowers are ones with low andinconsistent income
§ Because subprime loans are riskier, they carry ahigher rate of interest
§ Not all subprime mortgage loans were used for
buying houses but to refinance other obligationslike credit card debts
7/31/2019 BPLR & Base Rate
http://slidepdf.com/reader/full/bplr-base-rate 14/255/22/12
Sub prime mortgageoriginations
7/31/2019 BPLR & Base Rate
http://slidepdf.com/reader/full/bplr-base-rate 15/255/22/12
Contd.
7/31/2019 BPLR & Base Rate
http://slidepdf.com/reader/full/bplr-base-rate 16/255/22/12
Contd.
§ The bankers who originated subprime loansconverted them to bundles of securities andsold the packaged Mortgage BackedSecurities (MBS) in financial markets.
§ This allowed banks to pass on the risk of default to investors of MBS.
§ This allowed banks to get these loans off their balance sheet and borrow more, only to
originate more subprime loans.
7/31/2019 BPLR & Base Rate
http://slidepdf.com/reader/full/bplr-base-rate 17/25
5/22/12
Impact on India
Capital Outflow
Impact on stock and forex market
Impact on the Indian BankingSystem
Impact on Industrial Sector and
7/31/2019 BPLR & Base Rate
http://slidepdf.com/reader/full/bplr-base-rate 18/25
5/22/12
News article EconomicTimes March 5, 2008
The subprime loan crisis in the UShas taken its first toll in India withICICI Bank's profit taking a hit of more than Rs 1,050 crore ($264million) in 2007-08.
While the disclosure was made inParliament on Tuesday, the banksaid it had neither invested directlyin the USD market nor taken an
7/31/2019 BPLR & Base Rate
http://slidepdf.com/reader/full/bplr-base-rate 19/25
5/22/12
Learnings from the crisis
Sound banking practices
Controlled derivatives market
Limited investment by Indian
companies abroad
Financial institutions can’t afford to beshortsi hted
T R t C t B k
7/31/2019 BPLR & Base Rate
http://slidepdf.com/reader/full/bplr-base-rate 20/25
5/22/12
Teaser Rates Controversy – Brakesapplied by RBI as regards TeaserRates
7/31/2019 BPLR & Base Rate
http://slidepdf.com/reader/full/bplr-base-rate 21/25
5/22/12
Teaser rates
A low initial interest rate on anadjustable-rate mortgage to enticeborrowers, that is later eliminatedand replaced by a market-level rate.
From April 1 to September 25, 2010housing credit increased byRs.16,195 crore as compared toRs.7,891 crore.
7/31/2019 BPLR & Base Rate
http://slidepdf.com/reader/full/bplr-base-rate 22/25
5/22/12
Bangalore on January 21. Home loansoffered with teaser interest rates havehigher risk than those with normal
interest rates.• Under the SBI Easy Home Loan
scheme, where the bank was offeringloans up to Rs 30 lakh, the interest ratewas fixed at 8% in the first year and 9%for the next two years.
• For home loans above Rs 30 lakh, theSBI Advantage Home Loan schemeoffered 8% fixed rate of interest for thefirst year and 9.5 % for the next two
years. From the fourth year, the interestrates on these loans were linked to the bank’s benchmark prime lending rate.
7/31/2019 BPLR & Base Rate
http://slidepdf.com/reader/full/bplr-base-rate 23/25
5/22/12
Concerns over teaserrate
Borrowers may find it difficult to servicethe loans once the normal interest rate,which is higher than the rate applicable in
the initial years.
Banks at the time of initial loan appraisal,
do not take into account the repayingcapacity of the borrower at normallending rates.
'
7/31/2019 BPLR & Base Rate
http://slidepdf.com/reader/full/bplr-base-rate 24/25
5/22/12
RBI’s measures
It put a ceiling of 80 per cent on the Loan to Value(LTV) ratio, which reduces leverage by requiringborrowers to commit their own equity to theextent of at least 20 per cent of the value of theasset at the very beginning.
It had decided to raise the average risk weight
associated with larger housing loans.
RBI decided to increase the provisioning requiredfor these assets categorised as standard assetsfrom 0.4 per cent to 2 per cent.
7/31/2019 BPLR & Base Rate
http://slidepdf.com/reader/full/bplr-base-rate 25/25
5/22/12
THANK
YOU