ALM TERM PAPER
Submitted By: Group 3
Sunny Khatwani (U109047)
Suvendu Panda (U109048)
Tuktuk Bansal (U109050)
Abhijeet Ray (U109051)
Abhinav Mittal (U109053)
Anuradha Mohnata (U109055)
Anwesh Padhee (U109056)
Arijit Rej (U109057)
Ayan Ghosh (U109059)
Batala Mayuri (U109060)
Bank: Punjab National Bank
Category: Nationalised Bank
Year and Basis: Financial Year 2009-10 (Annual Report)
There are three components to the Term Paper:
Benchmark Prime Lending Rate (BPLR):
Base Rate: 8.99%
CRIB Score based on CAMEL Rating: 73.166 (Credit Rating: A, Modest Risk)
Detailed calculations are shown in subsequent sections.
I. Benchmark Prime Lending Rate (BPLR)
II. Base Rate
What is Base Rate?
Starting July 1, 2010, RBI had introduced a new Base Rate system which will set the interest rates for the bankers to lend their borrowers. It is the minimum rate of interest that a bank is allowed to charge from its customers. Unless mandated by the government, RBI rule stipulates that no bank can offer loans at a rate lower than base rate to any of its customers. Before setting the Base Rate System, banks used another rate system called Benchmark Prime Lending Rate (BPLR) to set their lending rates.
Why Base rate?
There was an inherent structural problem in the banking industry. Even though the industry is by and large deregulated, a few lending rates are still mandated and linked to banks’ BPLR. Previously, banks used to price the loans they offered you on a complicated system. Each bank has its own BPLR methodology which made it difficult for borrowers to compare rates across banks. Also due to the fact that certain loans had mandate to be given below banks’ BPLR e.g. loans to exporters and small farmers. So banks preferred to keep their BPLR at an artificially high level and charge most of their borrowers a rate much below the benchmark rate. This is the only way they could prevent loan rates for exporters and small farmers from declining to a level that does not even cover their cost of funds. Hence to assess the transmission of policy rates of the Reserve Bank to lending rates of banks and to enhance transparency in lending rates of banks and enabling better assessment of transmission of monetary policy, the Base Rate system is introduced.
How is it different from BPLR?
Base Rate is a more objective reference number than the banks’ prime lending rate BPLR is the rate at which a bank is willing to lend to its most trustworthy, low-risk customer. However, often banks lend at rates below BPLR. For example, most home loan rates are at sub-BPLR levels. Some large corporate also get loans at rates substantially lower than BPLR. For all banks, Base Rate is much lower than their BPLR.
How Base Rate is calculated?
Major focus of base rate system is transparency on calculation method to arrive the base rates. Every bank has to declare to the public how they have calculated the base rates. Base Rate shall include all those elements of the lending rates that are common across all categories of borrowers. While each bank may decide its own Base Rate, some of the criteria that could go into the determination of the Base Rate are:
Cost of deposits
Adjustment for the negative carry in respect of CRR and SLR 3.
Overhead cost for banks such as aggregate employee compensation relating to administrative functions in corporate office etc. 4.
Average Return on Net Worth
Loan pricing will be based on this base rate and other components such as Product specific operating cost, Default premium and Maturity premium.
What are the exceptions to Base Rate?
The base rate system will not be applicable for the following type of loans:
Loans given to own employees
Loans against deposit
How Base rate will affect banks?
Large banks that have higher percentage of low cost deposits and better operating efficiency will have a lower base rate...
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