Banks, Prime Lending Rates & Base Rates
Of all the momentous decisions which were taken in the financial sector, the decision to nationalize banks should be regarded as as a landmark one . It was the step taken by the government led by the late Indira Gandhi. Her critics would say that she did it to establish her socialist credentials and it was more of a populist move. But the facts remains that barring some quarters who are very critical of the functioning of these nationalized banks, the growth of non-performing assets, thoroughly unprofessional conduct of their affairs, in the perception of the common people these nationalized banks rank still very high. when it comes to fulfilling their security needs. While we have seen the growth of private banks but these banks are mostly into class banking than mass banking.
Nationalized Banks and Priority Sector Lending
The nationalized banks are required to cater to the loan needs of certain category of borrowers under the directives of the government at a concessional rate. These banks are required to lend a certain percentage of their deposits towards this end. For example, sectors like agriculture, small scale industries, export etc. are considered to be priority sectors and enjoy the low interest rate regime. This created a very interesting situation. While the recovery rate from resources employed in priority sector was very poor, the banks sold loans to non- priority sector at a steep rate. And this high rate of interest was thought to be one of the main reasons for Indian industry not being very competitive.
Nationalized Banks and Prime Lending Rate
The Reserve Bank of India with sole intention of making the nationalized banks charge a minimum rate of interest on their loans which was designated as Prime Lending Rate. But the experience revealed all these nationalized banks were lending money to some of their select borrowers at rates which are below the Prime Lending Rate. The Reserve Bank appointed a committee of experts to look into this issue thoroughly. According to the recommendations of this expert committee the Reserve has decided to replace the Prime Lending Rate by a rate which is called base rates. Under new dispensation each bank will have to declare its base rate and no bank would be permitted to lend below this base rate. The base rate would be cost-plus rate. Thus banks would earn a positive return on all their loans.
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