Wednesday, October 3, 2012

Base Rates in Indian Banking System

Interest Rates in India were regulated for long years by RBI up to 1993.  On introduction of Financial Sector Reforms, after recommendations of first Narasimham Committee recommendations, several initiatives were taken to streamline the banking system.  Deregulated interest rates is one of them.  Due to pressure and stress on the productivity and profitability on account of internal and external reasons of course, all types of banks in India but PSBs in particular, were blamed to be inefficient.  Their Balance Sheets were neither strong nor clean let alone transparent.  Definition of NPA in a phased manner brought in a good amount of profitability in their management of credit portfolio.  Cost of Funds were looked at scientifically after ALM was also introduced in 1998-99. 

Prime Lending Rate, Benchmark Prime Lending Rate and now Base Rate have got in to the system pushing the different types of banks to operate in a competitive environment.  The regulator was a silent spectator till early nineties when CRR was at highest ie., 15% and SLR at its peak ie., at 39.5% thus choking the funds management and banks were struggling with several compliances like Priority Sector Lending.  Even now, there is a complaint that SMEs and other businesses are not being financed by the banking system at concessional rates making their viability very difficult. SBI being the leader in so many ways plays the role of trend setter and it is obligatory on the part of RBI to listen to their views.

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