What changed
The Bank Rate was reduced from 9.0% to 8.75%, a 25 basis point cut, effective October 29, 2013. Consequently, penal interest rates on reserve requirement shortfalls, which are linked to the Bank Rate, were revised downward: the rate of Bank Rate plus 3 percentage points fell from 12.00% to 11.75%, and Bank Rate plus 5 percentage points fell from 14.00% to 13.75%. The interest rate on refinance for SSI under Section 17(2)(bb) read with Section 17(4)(c) of the RBI Act was also reduced to 8.75%.
What it means for you
For Primary Urban Co-operative Banks, this reduction in the Bank Rate directly lowers the cost of penalties for failing to maintain required reserves. It also makes SSI refinance cheaper, potentially encouraging lending to small-scale industries. Banks should update their systems to reflect the new penal rates and refinance rate immediately.
What you must do
- Update internal systems to apply the revised penal interest rates of 11.75% and 13.75% for reserve shortfalls effective October 29, 2013.
- Adjust the interest rate on SSI refinance to 8.75% per annum for all new and outstanding refinance under Section 17(2)(bb) read with Section 17(4)(c).
- Communicate the changes to relevant departments and ensure compliance in reporting and customer dealings.
Who it affects
Primary Urban Co-operative Banks, Borrowers availing SSI refinance under Section 17(2)(bb) of RBI Act, Banks facing penal charges for reserve shortfalls
What is the new Bank Rate effective from October 29, 2013?
The Bank Rate has been reduced by 25 basis points from 9.0% to 8.75%.
How are penal interest rates on reserve shortfalls affected?
Penal rates linked to the Bank Rate are reduced: the rate of Bank Rate plus 3 percentage points is now 11.75% (down from 12.00%), and Bank Rate plus 5 percentage points is now 13.75% (down from 14.00%).
Does this circular affect SSI refinance rates?
Yes, the interest rate on refinance for SSI under Section 17(2)(bb) read with Section 17(4)(c) of the RBI Act has been revised to 8.75% with effect from October 29, 2013.