1) BPLR & Base Rate 2) Sub-Prime Lending Crisis 3) Teaser Rates ControversyBrakes applied by RBI as regards teaser rate.

5/22/12

BPLR

BPLR (Benchmark Prime Lending Rate) interest rate that commercial banks normally charge their most credit-worthy customers. Management Committee (ALCO) to fix interest rates on Deposits and Advances. are free to fix Benchmark Prime Lending Rate (BPLR) for credit limits over Rs.2 lakh with the approval of their Boards.

Asset-Liability

Banks

5/22/12

Problems with BPLR

1 ) Sub-BPLR lending

For Private banks, the figure was even higher at 83%. agriculture, and corporate segments were the major beneficiaries of sub-BPLR lending.

Housing,

5/22/12

Sub BPLR lending

5/22/12

CONTD.
2) BPLR failed to respond to the changes in the monetary policy

5/22/12

Base rate
Base

Rate System is for the banks to set a level of minimum interest rates charged while giving out the loans. was implemented from 1st July, 2010.

It

is proposed to be calculated by including the cost of deposits, cost of maintaining the statutory liquidity ratio and cash reserve ratio, cost of running the 5/22/12

It

Impact of Base rate

Base rate system will increase transparency in credit pricing and address the shortcomings of the BPLR system. will be directly impacted by the monetary measures initiated by the RBI.

It

5/22/12

Impact on banks

Large banks that have higher percentage of low cost deposits and better operating efficiency will have a lower base rate and thus they will be able to price their loan products competitively.

banks on the other hand will face problems in extending credit to 5/22/12 large corporate.

Small

Working group on BPL

The Reserve Bank announced the constitution of the Working Group on BenchmarkPrime Lending Rate (BPLR) in the Annual Policy Statement of 2009-10 (Chairman: ShriDeepak Mohanty) to review the BPLR system and suggest changes to make credit pricingmore transparent.

5/22/12

Recommendations
Need

to Replace the Present BPLR System with the Base Rate System Rate Lending to be Allowed within Limits to be Excluded from the Base

Sub-Base

Categories

Rate

(a) loans relating to selective credit 5/22/12 control

CONTD.
Scrupulous

Adhering to the Two Codes Prescribed by BCSBI for Floating Rate Loans in the Retail Segment

Benchmarks

Lending Rates for Small Loans up to Rs. 2 lakh to be Deregulated 5/22/12

Administered

Sub-Prime Lending Crisis

5/22/12

SUBPRIME MORTGAGE

Subprime loans are mortgages given to borrowers with less than perfect credit or poor credit history Most subprime borrowers are ones with low and inconsistent income Because subprime loans are riskier, they carry a higher rate of interest Not all subprime mortgage loans were used for buying houses but to refinance other obligations 5/22/12 like credit card debts

Sub prime mortgage originations

5/22/12

Contd.

5/22/12

Contd.

The bankers who originated subprime loans converted them to bundles of securities and sold the packaged Mortgage Backed Securities (MBS) in financial markets.

This allowed banks to pass on the risk of default to investors of MBS.

5/22/12

This allowed banks to get these loans off their balance sheet and borrow more, only to originate more subprime loans.

Impact on India
Capital

Outflow on stock and forex market on the Indian Banking

Impact

Impact

System
Impact

5/22/12

on Industrial Sector and

News article Economic Times March 5, 2008

The

subprime loan crisis in the US has taken its first toll in India with ICICI Bank's profit taking a hit of more than Rs 1,050 crore ($264 million) in 2007-08.

the disclosure was made in Parliament on Tuesday, the bank said it had neither invested directly 5/22/12the USD market nor taken an in

While

Learnings from the crisis

Sound banking practices derivatives market

Controlled

Limited

investment by Indian companies abroad

institutions cant afford to be 5/22/12 shortsighted

Financial

Teaser Rates Controversy Brakes applied by RBI as regards Teaser Rates

5/22/12

Teaser rates
A

low initial interest rate on an adjustable-rate mortgage to entice borrowers, that is later eliminated and replaced by a market-level rate. April 1 to September 25, 2010 housing credit increased by Rs.16,195 crore as compared to Rs.7,891 crore.

From

5/22/12

At the STATE BANK OF INDIA utsav in Bangalore on January 21. Home loans offered with teaser interest rates have higher risk than those with normal interest rates.
Under the SBI Easy Home Loan scheme, where the bank was offering loans up to Rs 30 lakh, the interest rate was fixed at 8% in the first year and 9% for the next two years.

For home loans above Rs 30 lakh, the SBI Advantage Home Loan scheme offered 8% fixed rate of interest for the first year and 9.5 % for the next two years. From the fourth year, the interest rates on these loans were linked to the banks benchmark prime lending rate.

5/22/12

Concerns over teaser rate

Borrowers

may find it difficult to service the loans once the normal interest rate, which is higher than the rate applicable in the initial years. at the time of initial loan appraisal, do not take into account the repaying capacity of the borrower at normal lending rates.

Banks

5/22/12

RBIs measures

It put a ceiling of 80 per cent on the Loan to Value (LTV) ratio, which reduces leverage by requiring borrowers to commit their own equity to the extent of at least 20 per cent of the value of the asset at the very beginning. It had decided to raise the average risk weight associated with larger housing loans.

RBI decided to increase the provisioning required for these assets categorised as standard assets from 5/22/12 0.4 per cent to 2 per cent.

THANK YOU

5/22/12