With improved liquidity conditions, banks have come back on the trend of disbursing loans at discounted rate that is below benchmark prime lending rates (BPLR).
Majority of the fresh loans of the banks are being disbursed at sub-PLR rates that were been avoided by the banks due to the risk of high default during the slowdown. But now banks are extending 65-70% of the fresh loans at sub-PLR rates.
In a meeting with the Cabinet Secretary K M Chandrasekhar, bankers said that majority of them had their BPLR in the range of 12% to 12.25% and they were extending most of their loans at rates lower than the BPLR.
Loans to large manufacturing firms and short-term farm loans are available at single digit rates but rates for commercial real estate are yet to reach this level.
However a banker said, "BPLR has little relevance since we are offering short-term credit, which is backed by adequate securities, at 7.5 to 8 percent."
On the other hand, another chief from a bank said there is not other option but to lend at a discounted rates to ensure adequate credit growth since the demand for funds is low and liquidity is sufficient.
Chairman of a PSU bank said, "The pricing has to be right. If you give loans at cheap rates, you face the prospects of default. At the same time, if interest rates are high, borrowers will get a loan from a different bank and we will lose business. We have no option but to offer sub-PLR loans."
These PSU banks have recorded a yield of around 10-10.5% in their loan book where as the average cost of funds are nearly 7%. If the cost of funds for banks range around 7% then the minimum rate at which banks can lend after considering the operating costs into account is around 9%. "We need to build in the default risk and other social obligations that are thrust upon us so the average yield would be higher," said a banker.
A source present at the meeting said, "Public sector banks can lower BPLRs further but the discount will also come down by the same magnitude."
The recent cut in policy rates by RBI also prompted many banks to cut their PLRs. Most of the banks including some of the private and foreign lenders have also responded to the RBI's move and cut their interest rates.