Banks face RBI heat for arbitrary PLRs

The Reserve Bank of India (RBI) has rapped banks for their arbitrary manner of fixing their benchmark prime lending rates (BPLRs).

"Though the Reserve Bank has been advising banks to evolve their own BPLR by taking into account the cost of funds, transaction cost and reasonable cover for the risk, the fixation of the BPLR continues to be more arbitrary than rule-based," RBI said in its Report on Trend and Progress of Banking in India, 2006-07.

The arbitrariness was reflected in the sub-PLR lending, the share of which in total lending of commercial banks increased to 79 per cent of the total outstanding advances above Rs 2 lakh at end-March 2007 from 69 per cent at end-March 2006.

RBI said, "Lending below the BPLR has several implications. First, it lacks transparency and, hence, affects both lenders and borrowers. Second, to compensate for sub-BPLR lending, other segments are charged higher rate of interest, thus, leading to cross-subsidisation of the economically well-off borrowers by the economically poor borrowers." 
 

DISTURBING INCONSISTENCIES Movements in deposit and Lending Interest Rates
In per cent	March 2005	March 2006	March 2007	October 2007
BPLR
Public Sector Banks	10.25-11.25	10.25-11.25	12.25-12.75	12.50-13.50
Private Sector Banks	11.00-13.50	11.00-14.00	12.00-16.50	13.00-16.50
Foreign Banks	10.00-14.50	10.00-14.50	10.00-15.50	10.00-15.50
Actual Lending Rates*
Public Sector Banks	2.75-16.00	4.00-16.50	4.00-17.00	-
Private Sector Banks	3.15-22.00	3.15-20.50	3.15-25.50	-
Foreign Banks	3.55-23.50	4.75-26.00	5.00-26.50	-
*: Interest rate on non-export demand and term loans above Rs.2 lakh excluding lending rates at the extreme five per cent on both sides.

The continued high credit demand during the year (2006-07) exerted some upward pressure on lending rates as well as deposit rates of banks.

Accordingly, interest rates hardened across various maturity spectrum on both the liability and the asset sides of banks. Reflecting these trends, during 2006-07, the range of BPLRs of PSBs, private sector banks and foreign banks hardened in the range of 100-250 basis points. The bank of BPLRs of private sector banks and foreign banks was much wider than that of public sector banks.

During April-October 2007, the BPLRs of private sector banks moved from a range of 12.50-17.25 per cent to 13.00-16.50 per cent in the same period.

The range of BPLRs of public sector banks and foreign banks, however, remained unchanged at 12.50-13.50 per cent and 10.00-15.50 per cent respectively, during the period.