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Base Rate System The bare-assed Interest Rate Structure for Indian Banks

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Till the late 1980s the interest rate coordinate in India was largely administered and quite complex in nature. Efforts were initiated from 1990 to slew interest rate structure so as to mark price discovery and transparency in add price musical arrangement. The process of rationalization led to deregulation of lending grade in October 1994. The easying up of lending dedicate of plan commercialised banks for credit limits of over Rs. 2 lac along with asylum of Prime Lending Rate (PLR) system in 1994 was a step in the direction aimed at ensuring competitive loan pricing. Subsequently Benchmark Prime Lending Rate (BPLR) system of pricing loans was introduced by Reserve Bank of India (RBI) in 2003 with an forecast that BPLR would be a benchmark rate for banks pricing of their loan products so as to ensure that it truly reflected the actual cost. Banks were free to fix BPLR with the approval of their respective Boards but their interest rates were to have a reference to the BPLR fixed. BPLR was the interest rate that the commercial banks were expected to charge their most credit worthy borrowers.



However, assorted limitations of the BPLR system also came to light over the years as stated below: The BPLR tended to be out of sync with securities industry conditions and did non adequately respond to changes in fiscal policy. The banks, more often than not private sector ones were not passing on the decrease in policy interest rates to customers, while they were active to raise interest rates whenever rates increased. Besides, as banks did not adjust lending rates in response to monetary policy, an important transmission channel through which RBI actions government issue the real economy of output, consumption and jobs was getting clogged. To overcome redundance liquidity at times and lower the percentage of nonperforming assets in overall loan...If you want to get a full essay, order it on our website: Ordercustompaper.com



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