The head of India's top chamber of commerce has warned that the country's newly introduced base rate mechanism could push up the cost of letters of credit (L/Cs).

The base rate mechanism fixes a minimum interest rate on all lending and means that banks are free to charge a higher interest rate but not a lower one.

Discounts threatened

President of the Associated Chambers of Commerce and Industry of India (Assocham), Swati A Piramal, said in a statement that some current arrangements by banks for funding against L/Cs would be severely affected by the base rate system.

He explained that such loans are routinely extended at a substantially reduced rate because payments are guaranteed.

Further calls

Piramal has also called for the base rate mechanism to cover non-banking finance companies, co-operative banks and regional rural banks.

The base rate for public sector banks is in the range of 7.5 per cent to 8.25 per cent, while the rate for private sector and foreign banks is lower by 50-100 basis points.

The introduction of the base rate mechanism in India's banking system aims to enhance competition in the short-term lending market.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.