Bankers have asked the Reserve Bank of India (RBI) to allow them to lend

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below the base rate to companies whose accounts are restructured but do not have a compensation clause for the money written off or interest waived (recompense clause).

Base rate is the floor price below which banks cannot lend effective July 1.

Though it need not be sector-specific, there are large corporate accounts in the steel and textiles sectors where the banks have lent at abnormally low rates of interest to revive the company without asking for any compensation or higher interest payments when the industry revives.

“It will be difficult for banks to hike the interest rate to the base rate levels, as the company is in dire need and the bank has agreed to help and revive the company at low rates of interest,” said one of the bankers who attended the pre-policy meeting held on Monday.

In one case, a large financial institution let go a steel company without a recompense clause when the case came to the corporate debt restructuring cell. These are basically deals that banks structure to help their clients get back on their feet and build client loyalty.

In an earlier circular, RBI had asked banks to have recompense clauses for restructured accounts so that the bank’s balance sheet is secured to a certain extend.

But banks have now taken up the case of restructured accounts where there are no cash flows in the company for a recompense clause. In some cases the banks have already reached an agreement with the company to lend below the bank’s existing base rate before the base rate regime came into existence on July 1.

Taking into account the liquidity situation, bankers have urged the central bank not to hike the cash reserve ratio (CRR) in its first Monetary Policy review on July 27 as it may aggravate the liquidity situation. CRR is the portion of deposits and liabilities that the banks are required to keep as reserves with RBI.

Bankers have also requested time till June 30, 2011 for complete migration to the base rate system. SBI chairman OP Bhatt told reporters that the RBI is considering to set a sunset clause for all loans linked to the prime lending rate (PLR) -- the rate at which banks lend to their best customers.

“In order to prevent any confusion by letting two regimes co-exist, it is only judicious that the central bank writes an epitaph to the PLR,” said another banker who attended the meeting.

Bankers also raised concerns on the slow growth in deposits compared with last year. But most of the bankers who attended the meet said the credit growth of 20 per cent projected by RBI for the year would be attainable.

The meeting was attended by RBI deputy governors Shyamala Gopinath, Subir Gokarn and KC Chakabarty. Bankers who attended the meeting included, Bank of Baroda chairman and managing director MD Mallya, Bank of India CMD Alok Mishra, Kotak Mahindra Bank MD Uday Kotak, Federal Bank chairman and managing director MD Venugopal, Axis Bank CEO Shikha Sharma, and HSBC India CEO Stuart Davis.