The newly-appointed Reserve Bank of India deputy governor KC Chakrabarty has pointed out that the existing borrowers should also get the benefits of the reduced interest rates. He said the same rates should be charged from the existing borrowers with floating rate loans as being charged from the new borrowers.
In an interview to ET soon after taking the charge, Mr Chakrabarty said: “A bank cannot offer differential rates for old and new customers if both have floating interest rate.” He stated the same rate should be charged from the old and new customers in line with international best practices.
Generally, banks have always extended better terms for new borrowers by varying the spread between the interest rate on the loan and the benchmark prime lending rate (BPLR). Expressing their views in favor of this flexibility bankers say that it is easy to pass on the benefit of lower incremental cost of funds to new customers as they do not have to wait for their portfolio costs to come down. It will not be possibe for them to launch any special scheme if the banks are forced to match rates for existing and new borrowers. Earlier KJ Udeshi, chairperson, the Banking Codes and Standard Board of India, had also indicated that benefits of any reduction in interest rate costs should be passed on evenly to all borrowers.
Mr Chakrabarty’s comments have corresponded with the central bank proposal of appointing a working group headed by RBI executive director Deepak Mohanty to review the benchmark prime lending rate (BPLR) of banks and recommend changes to the present system to make credit pricing more transparent. BPLR is the reference rate to which all floating rate loans advanced by a bank, including floating rate home loans, are tethered to.
Informing the appointment of the working group, the central bank has said that in the current scenario BPLR has lost its relevance because most of bank loans are advanced below PLR.
The working group will also recommend loan pricing measures set up on international best practices. Along with other things, it will also analysis the administered lending rates for small loans up to Rs 2 lakh and for exporters recommend suitable benchmark for floating rate loans in the retail segment.
Mr Chakrabarty, pointed out there is a need for strengthening the law to ensure that retail customers are protected. “We not only have to ensure that rates are linked to a floating rate, but also ensure that this rate moves in tandem with other rates in the system.”
Tuesday, June 16, 2009
Banks seek for relaxation in norms of classifying loans of delayed infrastructure projects
In the recent meeting with Finance Minister Pranab Mukherjee the bankers have raised an issue of infrastructure financing where they have asked for tax breaks for accessing cheaper funds to finance infrastructure projects. The lenders are demanding for the relaxation in the norms of classifying loans of delayed infrastructure projects as sub-standard assets even though the Reserve Bank of India (RBI) has given its unwillingness to lower the group exposure ceiling.
The suggestions put forwarded in the meeting included permission for the issuance of tax-free bonds, access to refinance and tax exemptions on loans for infrastructure projects under the Income Tax Act. However the government has already given approval to India Infrastructure Finance Co (IIFCL) to issue tax-free bonds and banks have also wanted the similar facility.
The sources say, the central bank is not keen on relaxing the group exposure ceiling in spite of government urge. It is believed that higher ceiling might create concentration risk for certain industrial groups.
In July last RBI had issued the master circular on exposure norms which stated a scheduled commercial bank’s exposure to a single company is restricted at 15 per cent of the capital funds, along with an additional exposure of 5 per cent allowed for financing infrastructure projects. Likewise, the exposure ceiling to a group of companies is restricted at 40 per cent, along with an additional 10 per cent lending permitted for infrastructure projects.
As many infrastructure project developers, especially of the power sector, have been raising the issue, therefore finance ministry had written to RBI lookout for relaxation.
On the other hand bankers present at last week’s meeting informed that the central bank has pointed out that it would not relax the ceiling. “Exposure beyond 50 per cent can create problems, especially during uncertain times,” stated a bank chief. A senior executive of an infrastructure-focused finance company also has the view point that the ceiling should not be raised.
Sources informed that in the meeting, the banks have requested the apex bank to simplify the provisioning norms for those infrastructure projects which were unable to start repayment on schedule due to project delays. A banker informed, “There are a lot of projects where implementation is delayed by a few months, but banks have to make provisions. It is not a case of default, but the provisions have to be made”.
As per RBI guidelines, regarding infrastructure projects financed by banks and financial institutions after May 28, 2002, the completion date should be clearly mentioned at the time of financial closure. From April 1 last year, if the date of commencement of commercial production is beyond two years as originally predicted, the account should be taken as a sub-standard asset, which requires provisioning.
In November 2008, RBI has given special relaxation in the rules for seven infrastructure projects which, post-restructuring continued to be treated as standard assets.
The projects which were given relaxation included Nandi Economic Corridor, gas-based power projects of GVK Industries, Gautami Power, Konaseema Gas Power, Vemagiri Power, a development project of Tirupur area and another being implemented by Delhi Gurgaon Super Connectivity.
Besides this, loans restructured under the special scheme announced last year can also be treated as standard assets in spite of restructuring.
The suggestions put forwarded in the meeting included permission for the issuance of tax-free bonds, access to refinance and tax exemptions on loans for infrastructure projects under the Income Tax Act. However the government has already given approval to India Infrastructure Finance Co (IIFCL) to issue tax-free bonds and banks have also wanted the similar facility.
The sources say, the central bank is not keen on relaxing the group exposure ceiling in spite of government urge. It is believed that higher ceiling might create concentration risk for certain industrial groups.
In July last RBI had issued the master circular on exposure norms which stated a scheduled commercial bank’s exposure to a single company is restricted at 15 per cent of the capital funds, along with an additional exposure of 5 per cent allowed for financing infrastructure projects. Likewise, the exposure ceiling to a group of companies is restricted at 40 per cent, along with an additional 10 per cent lending permitted for infrastructure projects.
As many infrastructure project developers, especially of the power sector, have been raising the issue, therefore finance ministry had written to RBI lookout for relaxation.
On the other hand bankers present at last week’s meeting informed that the central bank has pointed out that it would not relax the ceiling. “Exposure beyond 50 per cent can create problems, especially during uncertain times,” stated a bank chief. A senior executive of an infrastructure-focused finance company also has the view point that the ceiling should not be raised.
Sources informed that in the meeting, the banks have requested the apex bank to simplify the provisioning norms for those infrastructure projects which were unable to start repayment on schedule due to project delays. A banker informed, “There are a lot of projects where implementation is delayed by a few months, but banks have to make provisions. It is not a case of default, but the provisions have to be made”.
As per RBI guidelines, regarding infrastructure projects financed by banks and financial institutions after May 28, 2002, the completion date should be clearly mentioned at the time of financial closure. From April 1 last year, if the date of commencement of commercial production is beyond two years as originally predicted, the account should be taken as a sub-standard asset, which requires provisioning.
In November 2008, RBI has given special relaxation in the rules for seven infrastructure projects which, post-restructuring continued to be treated as standard assets.
The projects which were given relaxation included Nandi Economic Corridor, gas-based power projects of GVK Industries, Gautami Power, Konaseema Gas Power, Vemagiri Power, a development project of Tirupur area and another being implemented by Delhi Gurgaon Super Connectivity.
Besides this, loans restructured under the special scheme announced last year can also be treated as standard assets in spite of restructuring.
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