Banks against RBI’s plan to replace BPLR based loans
By Vaibhav Aggarwal
Dec 31, 2009
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Country's top-most lenders are against RBI's suggestion of replacing the benchmark prime lending rate (BPLR) with a base rate, a move aimed at bringing transparency into the lending process.

RBI would not force the banks to implement it until a consensus is reached, said an RBI official requesting anonymity.

A committee led by RBI official Deepak Mohanty to review the BPLR, the rate at which banks lend to its most creditworthy customers, system had suggested its replacement with a base rate in its recommendations submitted in October.

The base rate is the rate below which it is not possible for banks to lend. The rate takes into account the interest rate on one year deposits below Rs 15 lakh, the statutory liquidity ratio, cash reserve ratio and the average return on networth.

The base rate computed for the financial year ended March 2009 by RBI was 8.55 percent. Bankers say that introduction of the base rate system would increase the cost of funds availed by corporate by around 3 percentage points and lead to the discontinuation of special offers on home and auto loans. The banks have been lending to corporates at rates as low as 6 percent and teaser rates of 8 percent for home loan buyers for the first year.

SBI that accounts for 20 percent market share in terms of lending in the country is one of the banks that have raised objections regarding the introduction of a base rate system. An SBI official said, "A uniform method across banks to decide the base rate is impractical as interest rates have to be market determined."

The current system of BPLR lending is ineffective as banks do close to 80 percent of lending below it. The lowest BPLR of 11 percent is offered by Punjab National Bank, while some private banks have BPLRs as high as 15 percent.

A decade ago banks had taken permission from the RBI to lend below the benchmark rate known as sub-PLR. The banks had argued that if they do not lend below PLR they would lose customers to mutual funds.

Although RBI accepted bankers' argument, from long time it is being felt that the practice of lending loans below PLR is not transparent.


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