In an attempt to enhance the transmission of monetary policy effect in the system and bring transparency in the pricing of loans by the banks, the regulatory authority, Reserve Bank of India has appointed a working group for reviewing the existing system of loan pricing.

The group to be headed by Deepak Mohanty, executive director, RBI and would investigate the best international practices in the area, suggest changes for the Indian system. Besides this, the group will also look into the lending rates for loans (up to Rs 2 lakh) extended by the bankers to the exporters. It would also analyze the deviation of actual lending rates from the BPLR and suggest a suitable BPLR for the banks.

The committee will have representative members from the Indian Banks' Association, the Banking Codes and Standards Board of India besides veteran bankers and external experts from the industry.

The step has been taken in view of the increased sub-benchmark prime lendings by the banks. In a statement, RBI said, "The system of benchmark prime lending rate (BPLR) has evolved in such a manner that it has lost its relevance as a meaningful reference rate as bulk of loans are advanced below BPLR."

The statement also pointed that the sub-BPLR lending (Jun 10, 2009) ‘impedes the smooth transmission of monetary signals and makes the loan pricing system non-transparent.'

In recent past, KC Chakrabarty, chief managing director, PNB, who has been notified for appointment as the deputy governor of Reserve Bank of India (RBI) had asked the banks to refrain from lending at below BPLR.

RBI introduced the benchmark prime lending rate system in November 2003 to bring transparency in the system of lending. Most banks have been extending loans at 2.5-3 percentage points below the BPLR.

The annual policy report 2009-10, stated "over time, the system of BPLR has evolved in such a manner that it has lost its relevance as a meaningful reference rate as bulk of loans are advanced at below BPLR. Furthermore, this impedes the smooth transmission of monetary signals and makes the loan pricing system non-transparent".