What changed
The Bank Rate was increased from 8.75% to 9.0%, a 25 basis point hike, effective January 28, 2014. Consequently, penal interest rates on reserve requirement shortfalls rose: the lower tier moved from 11.75% to 12.0%, and the upper tier from 13.75% to 14.0%. The interest rate on refinance for SSI under Section 17(2)(bb) of the RBI Act also increased to 9.0%.
What it means for you
Urban co-operative banks will face higher costs for any reserve shortfalls, as penal rates are now pegged to the higher Bank Rate. The SSI refinance rate increase may tighten liquidity for small-scale industry lending. Banks should review their reserve maintenance processes to avoid penalties and reassess SSI loan pricing.
What you must do
- Update internal systems to reflect the new Bank Rate of 9.0% for calculating penal interest on reserve shortfalls.
- Communicate the revised penal rates (12.0% and 14.0%) to relevant treasury and compliance teams.
- Review SSI loan portfolios to account for the higher refinance rate of 9.0% in cost calculations.
- Monitor reserve maintenance closely to avoid shortfalls and associated penalty costs.
Who it affects
Primary (Urban) Co-operative Banks, Treasury and compliance departments of urban co-op banks, Borrowers under SSI refinance schemes
What is the new Bank Rate effective from January 28, 2014?
The Bank Rate has been revised upward by 25 basis points from 8.75% to 9.0%, effective January 28, 2014.
How do the revised penal interest rates work for reserve shortfalls?
Penal rates are now Bank Rate plus 3 percentage points (12.0%) or Bank Rate plus 5 percentage points (14.0%), depending on the duration of the shortfall.
Does this change affect SSI refinance?
Yes, the interest rate on refinance for SSI under Section 17(2)(bb) of the RBI Act has also been revised to 9.0%.