Tuesday, July 13, 2010

Banks request RBI to announce sunset clause till June30, 2011

Yesterday bankers had met the Reserve Bank of India (RBI) officials and have requested to announce the sunset clause via a fiat with June 30, 2011 as the deadline. They said such a short time for switching over to base rate can get involved in litigation of clients, especially those that have taken loans for big projects, might refuse to move to new base rate system from the previous benchmark prime lending rate system at the time of annual renewal of loans.

Therefore it is expected that the RBI might soon announce a one-year sunset clause to help banks move all their existing loans to the new base rate-linked lending regime.

Mr O. P. Bhatt, Chairman, State Bank of India said RBI is scrutinizing the pros and cons of the proposed sunset clause thus the announcement is likely to be made soon. Mr Bhatt, who is also Chairman of the Indian Banks' Association, was addressing the media after bankers had given their feedback to the RBI top brass for the quarterly review of the Monetary Policy, scheduled to be released on July 27.

Dr K. Ramakrishnan, Chief Executive, IBA informed that issue on dealing with corporate debt restructuring (CDR) under the base rate regime was also taken up for discussion.

Banks offer concessions and waivers on interest rates, rescheduling repayment, and converting debt into equity to the corporate to help them in getting back to business via debt restructuring. During the discussions bankers said although, they are not allowed to lend below the base rate, but RBI should make some provision to allow them to reduce interest rate to the base rate level or lower as the recompense clause under CDR which will help in offering concessions.

Since May-end banking system has been experiencing liquidity tightness, bankers point out by end of July it is likely to improve.

“Liquidity is expected to improve by July-end and beyond,” said Mr Bhatt. Another banker pointed out unless credit demand move upwards, banks will not raise deposit rates.