Benchmarking set to lower PLR by 25-50 basis points

IBA chairman V Leeladhar told Business Standard banks will be able to announce their respective benchmark PLRs by early January after their boards grant approvals.

"Once the banks shift to benchmark PLR, the rate will come down by 25 to 50 basis points. Earlier, all banks followed the leader in setting the PLR. This approach to PLR was unscientific. Now the IBA prescribed formula will set this right," Leeladhar, who is also the chairman and managing director of Union Bank of India, said.

At present, the PLRs of most banks, especially in the public sector, falls in the 10.5 to 12 per cent bracket. The level is likely to come down to 10 to 11.5 per cent.

However, home loans and personal loans will not be covered by the benchmark PLR concept. Besides, banks will continue to lend at below prime rates.

HN Sinor, IBA chief executive, said interest on home loans, consumer loans,  loans against shares and debentures, and other non-priority sector personal loans, loans to bank's own employees and for bill discounting will not be linked to the benchmark PLR.

The objective behind the benchmark PLR is to bring transparency in the pricing of lending products. Banks will determine the lending rates on loans and advances with limits in excess of Rs 2 lakh with reference to the benchmark PLR.

The pricing for borrowers will be arrived at by adding term and, risk premia and such other elements of costs as may be considered necessary.

The Reserve Bank of India in its April credit policy advised banks to announce a benchmark PLR with the approval of their boards, taking into consideration their actual cost of funds, operating expenses and a minimum margin to cover regulatory requirements of provisioning and capital charge, and profit margin.

Hitherto, it was the asset-liability management committee of banks that took the final decision on PLRs. But now the benchmark PLR will require the board nod.