RBI Master Circular No: RBI/2013-14/73 (01-Jul-13) Master Circular - Interest Rates on Advances

DBOD.No.Dir.BC. 15 /13.03.00/2013-14

All Scheduled Commercial Banks

(excluding RRBs)

Dear Sir / Madam

Please refer to the Master Circular DBOD.No.Dir.BC.5/13.03.00/2012-13 dated July 2, 2012 consolidating instructions / guidelines issued to banks till June 30, 2012 on matters relating to Interest Rates on Advances. The Master Circular has been suitably updated by incorporating instructions issued up to June 30, 2013 and has also been placed on the RBI website (http://www.rbi.org.in). A copy of the Master Circular is enclosed.

Yours faithfully

Prakash Chandra Sahoo

Chief General Manager

Encl: as above

CONTENTS

Para No. Particulars
A Purpose
B Classification
C Previous instructions
D Application
1 Introduction
2 Guidelines
2.1 General
2.2 Base Rate
2.3 Applicability of Base Rate
2.4 Floating Rate of Interest on Loans
2.5 Levying of penal rates of interest
2.6 Enabling clause in loan agreement
2.7 Withdrawals against uncleared effects
2.8 Loans under consortium arrangement
2.9 Charging of interest at monthly rests
2.10 Zero percent Interest Finance Schemes for Consumer Durables
2.11 Excessive interest charged by banks
Annex 1 Illustrative Methodology for the Computation of the Base Rate
Annex 2 Guidelines on Benchmark Prime Lending Rate (BPLR) applicable to loans sanctioned up to June 30, 2010
Annex 3 Interest Rate Structure for all Rupee Advances
including Term Loans of Commercial Banks sanctioned up to June 30, 2010
Appendix List of circulars consolidated

A. Purpose

To consolidate the directives on interest rates on advances issued by Reserve Bank of India from time to time.

B. Classification

A statutory directive issued by the Reserve Bank in exercise of the powers conferred by the Banking Regulation Act, 1949.

C. Previous instructions

This Master Circular consolidates and updates the instructions on the above subject contained in the circulars listed in Appendix.

D. Application

To all scheduled commercial banks, excluding Regional Rural Banks.

Structure

1. Introduction

2. Guidelines

2.1 General
2.2 Base Rate
2.3 Applicability of Base Rate
2.4 Floating rate of interest on loans
2.5 Levying of penal rates of interest
2.6 Enabling clause in loan agreement
2.7 Withdrawals against uncleared effects
2.8 Loans under consortium arrangement
2.9 Charging of interest at monthly rests
2.10 Zero percent interest finance schemes for consumer durables
2.11 Excessive interest charged by banks
Annex 1 Illustrative Methodology for the Computation of the Base Rate
Annex 2 Guidelines on Benchmark Prime Lending Rate (BPLR) applicable to loans sanctioned up to June 30, 2010
Annex 3 Interest Rate Structure for all Rupee Advances including Term Loans of Commercial Banks sanctioned up to June 30, 2010
Appendix List of circulars consolidated

1 Introduction

1.1 Reserve Bank of India began prescribing the minimum rate of interest on advances granted by Scheduled Commercial Banks with effect from October 1, 1960. Effective March 2, 1968, in place of minimum lending rate, the maximum lending rate to be charged by banks was introduced, which was rescinded with effect from January 21, 1970, when the prescription of minimum lending rate was reintroduced. The ceiling rate on advances to be charged by banks was again introduced effective March 15, 1976, and banks were also advised, for the first time, to charge interest on advances at periodic intervals, that is, at quarterly rests. In the following period, various sector-specific, programme-specific and purpose-specific interest rates were introduced.

1.2 Given the prevailing structure of lending rates of Scheduled Commercial Banks, as it had evolved over time, characterised by an excessive proliferation of rates, in September, 1990, a new structure of lending rates linking interest rates to the size of loan was prescribed which significantly reduced the multiplicity and complexity of interest rates. In the case of the Differential Rate of Interest Scheme under which credit was provided at a rate of 4.0 per cent per annum, and Export Credit, which was subject to an entirely different regime of lending rates supplemented by interest rate subsidies, the existing lending rate structure was continued.

1.3 An objective of financial sector reform has been to ensure that the financial repression inherent in administered interest rates is removed. Accordingly, in the context of granting greater functional autonomy to banks, effective October 18, 1994, it was decided to free the lending rates of scheduled commercial banks for credit Iimits of over Rupees two lakh; for loans up to Rupees two lakh, it was decided that it was necessary to continue to protect these borrowers by prescribing the lending rates and accordingly it was prescribed that for loans up to and inclusive of Rupees two lakh, the lending rates of banks should not exceed the Benchmark Prime Lending Rate (BPLR) of the respective banks. For credit limits of over Rupees two lakh, the prescription of minimum lending rate was abolished and banks were given the freedom to fix the lending rates for such credit limits subject to BPLR and spread guidelines. Banks were required to obtain the approval of their respective Boards for the BPLR, which would be the reference rate for credit Iimits of over ` 2 lakh. Each bank's BPLR had to be declared and be made uniformly applicable at all branches.

1.4 The BPLR system, introduced in 2003, fell short of its original objective of bringing transparency to lending rates. This was mainly because under the BPLR system, banks could lend below BPLR. For the same reason, it was also difficult to assess the transmission of policy rates of the Reserve Bank to lending rates of banks. Accordingly, based on the recommendations of the Working Group on Benchmark Prime Lending Rate which submitted its report in October 2009, banks were advised to switch over to the system of Base Rate with effect from July 1, 2010. The Base Rate system is aimed at enhancing transparency in lending rates of banks and enabling better assessment of transmission of monetary policy.

2 Guidelines

2.1 General

2.1.1 Banks should charge interest on loans / advances / cash credits / overdrafts or any other financial accommodation granted / provided / renewed by them or discount usance bills in accordance with the directives on interest rates on advances issued by Reserve Bank of India from time to time.

2.1.2 The interest at the specified rates should be charged at monthly rests (subject to the conditions laid down in paragraph 2.9) and rounded off to the nearest rupee.

2.2 Base Rate

2.2.1 The Base Rate system has replaced the BPLR system with effect from July 1, 2010. Base Rate shall include all those elements of the lending rates that are common across all categories of borrowers. Banks may choose any benchmark to arrive at the Base Rate for a specific tenor that may be disclosed transparently. An illustration for computing the Base Rate is set out in Annex 1. Banks are free to use any other methodology, as considered appropriate, provided it is consistent and is madeavailable for supervisory review/scrutiny, as and when required.

2.2.2 Banks may determine their actual lending rates on loans and advances with reference to the Base Rate and by including such other customer specific charges as considered appropriate. The actual lending rates charged should be transparent and consistent and be madeavailable for supervisory review/scrutiny, as and when required.

2.2.3 In order to give banks some time to stabilize the system of Base Rate calculation, banks were permitted to change the benchmark and methodology any time during the initial six month period, i.e. end-December 2010. This period was extended by a further period of six months i.e. upto June 30, 2011.

2.2.4 There can be only one Base Rate for each bank. Banks have the freedom to choose any benchmark to arrive at a single Base Rate which should be disclosed transparently.

2.2.5 Changes in the Base Rate shall be applicable in respect of all existing loans linked to the Base Rate, in a transparent and non-discriminatory manner.

2.2.6 Since the Base Rate will be the minimum rate for all loans, banks are not permitted to resort to any lending below the Base Rate. Accordingly, the stipulation of BPLR as the ceiling rate for loans up to ` 2 lakh stands withdrawn. It is expected that the above deregulation of lending rate will increase the credit flow to small borrowers at reasonable rate so that direct bank finance will provide effective competition to other forms of high cost credit.

2.2.7 Banks are required to review the Base Rate at least once in a quarter with the approval of the Board or the Asset Liability Management Committees (ALCOs) as per the bank''s practice. Since transparency in the pricing of lending products has been a key objective, banks are required to exhibit the information on their Base Rate at all branches and also on their websites. Changes in the Base Rate should also be conveyed to the general public from time to time through appropriate channels. Banks are required to provide information on the actual minimum and maximum lending rates to the Reserve Bank on a quarterly basis, as hitherto.

2.2.8 Even after introduction of the Base Rate system, banks would have the freedom to offer all categories of loans on fixed or floating rates. Where loans are offered on fixed rate basis, notwithstanding the quarterly review of the Base Rate, the rate of interest on fixed rate loans will continue to remain the same subject to the condition that such fixed rate should not be below the Base Rate at the time of sanction. If the base rate is revised upward thereafter and in the process the fixed rate falls below the new Base Rate, it would not be construed a...

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