A recent RBI report on Benchmark prime lending rates (BPLRs) revealed indicates that the proportion of sub-PLR loans has decreased over the previous year. it says that around 67 percent of the loans disbursed by the banks were sub-PLR as compared to 75 percent a year ago.
BPLR is the rate at which the top rated borrower gets a loan, that is, if a bank has a PLR of 11 percent, a borrower rated AAA would get this loan at 11 percent, while borrowers rated lower than this will have to pay a higher rate of interest.
Lending below the prime lending rate makes it difficult to track the movement of lending rates even if banks cut down their interest rates.
Since 2001-02, when RBI allowed the sub-PLR lending practice for loans over Rs. 2 lakh, disbursal below the prime lending rate has been on rise due to intense competition and easy liquidity. In March 2009, the proportions of sub-PLR loans for the foreign, private and public sector banks were 68percent, 84 percent and 64 percent respectively. However, this proportion decreased from 81 percent, 91 percent and 71 percent in March 2007. This was due to the global crisis. The banks became more careful while lending below the PLR. Private banks have a larger proportion of sub-PLR loans due to higher PLR rates for these banks.
The report also reveals that longer tenure loans, more than three years and cash credit recorded a larger proportion of sub-PLR loans. Most of the home loans and personal loans disbursed were below the PLR.In March 2008, around 80 percent of home loans charged rates below 12 percent which was less than or equal to Prime lending rate for most of the banks.
A panel from Reserve Bank of India has proposed a transparent pricing structure for floating rate loans. As per the proposal the benchmark rates would get automatically revised with the reduction in cost of funds.
The panel has suggested the banks to discontinue using bank's prime lending rate in pricing floating rate loans and arrive at a base rate that reflects the cost of one year deposits. It has also proposed a cap on the extent of loans granted below the benchmark lending rate.