The Reserve Bank of India (RBI) on Thursday issued draft guidelines to replace the current method of calculating lending rates by banks with a new model, which is expected to help credit growth to small borrowers.
The current method followed by banks is to use the benchmark prime lending rate (BPLR) as the norm to calculate customer segment specific rates. 
"The base rate system will replace the BPLR system with effect from April 1. Banks may determine their actual lending rates on loans and advances with reference to the base rate," said the central bank in a statement on its website. 
"Since the base rate will be the minimum rate for all commercial loans, banks are not permitted to resort to any lending below the base rate," it added. 
The base rate system would be applicable for all new loans and for those old loans that come up for renewal. For existing borrowers who want to switch to the new system, a revised rate can be agreed upon mutually by the bank and the customer. 
The RBI had set up a committee under the chairmanship of its deputy governor Deepak Mohanty to review the BPLR system of fixing lending rates after criticism that banks were lending to corporate customers at rates below the BPLR. 
"It is expected that deregulation of lending rates will increase the credit flow to small borrowers at reasonable rate. Thus, direct bank finance will provide effective competition to other forms of high cost credit," said the RBI statement.

The Reserve Bank of India (RBI) on Thursday issued draft guidelines to replace the current method of calculating lending rates by banks with a new model, which is expected to help credit growth to small borrowers.

RBI proposes new lending rate system

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RBI proposes new lending rate system

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