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RBI asks banks to revisit process of calculating PLR


RBI asks banks to revisit process of calculating PLR

Last updated: June 1 2007
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  • RBI asks banks to revisit process of calculating PLR

    The Reserve Bank of India has said that banks must change the manner in which they arrive at their benchmark prime lending rate (PLT), the indicative rate on which all bank loans are priced. The central bank wants the prime lending rate to be more transparent considering that over 80% of bank loans are made below the PLR.

    RBI said that there is a perception that banks are charging lower rates for corporates and higher rates to farmers and small scale businessmen. “There is a public perception that banks’ risk assessment processes are less than appropriate and that there is underpricing of credit for corporates, while there could be overpricing of lending to agriculture and SSIs,” the report said.

    “Competition has turned the pricing of a significant proportion of loans far out of alignment with the BPLR and in a non-transparent manner,” RBI said in its report on currency and finance. The report adds that the BPLR has ceased to be a reference rate, thereby hindering an assessment of the efficacy of monetary transmission.

    The 80% of borrowers, who receive loans at sub-PLR rates, include most large corporates, home loans borrowers, exporters, agricultural borrowers and students seeking small educational loans. While banks have been directed to charge less for agricultural borrowers, exporters and students seeking small loans, it is competition that has driven down rates on loans to corporates and home loan borrowers to sub-PLR level.

    Although banks have been given the freedom to determine their lending rates, the principles followed by banks in fixing their benchmark prime lending rate (BPLR) are viewed as opaque. A predominant and growing proportion — over 80% – of the commercial banks’ loan portfolio is at sub-BPLR rates,” the central bank observed in its latest report on currency and finance.

    In the report, RBI observed that lending below the BPLR has several implications. In particular, the fixation of BPLR continues to be more arbitrary than rule-based. Therefore, the concept of arriving at the BPLR needs to be looked into with a view to making it more transparent.

    This is not the first time that the structuring of benchmark prime lending rates by banks has come under fire. Earlier, home loan borrowers complained that banks were lowering rate selectively for new borrowers and corporate clients. In the case of old home loan borrowers, variable rates on home loans were not lowered on the grounds that the benchmark rate was not revised.

    Historically, the prime lending rate has been the rate at which banks lend to the best borrower — the ones that are the least likely to default. In the past the PLR was the floor rate for most bank loans. In the late 90s, however, RBI allowed banks to lend below their prime lending rates.

    Also, in the past bulk of bank lending was towards working capital and the rates for working capital loans were revised along with every revision in the PLR.

    Source: The Economic Times
    Last edited June 1 2007, 09:53 AM. Reason: Edit
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