Lower bank rates have not helped small borrowers because banks have increased their spreads, said the National Council of Applied Economic Research (NCAER).
In its April issue of Macrotrack, the council said the finance minister's Budget announcement of letting the small-scale sector borrow funds at an interest rate of 2 per cent above and below the prime lending rate (PLR) would help those with a credit limit of more than Rs 2 lakh.
Public sector banks will have to make a concerted effort to cut their costs on account of overheads.
Lower costs will mean that lending rates can be linked to factors like expected inflation and long-term outlook on global rates.
Currently, the PLR does not represent anything about the lending rate, it states.
In fact, a system requiring bankers to declare their preferred lending rates according to slabs of credit limits may be more transparent and helpful thanthe existing system of arbitrary bands around the PLR, the issue says.
After deregulation of lending rates of commercial banks in October 1994, they were allowed to lend at sub-PLR rates for credit limits over Rs 2 lakh. However, the PLR has not been following the trend set by the Bank Rate of the Reserve Bank of India, it points out.
Between 1994 and 2002, the average PLR of five major commercial banks came down only by 2.5 per cent, as against a 5.5 per cent reduction in the Bank Rate. The spread has thus increased from 2 per cent to 5 per cent.
Also, the share of small borrowers has been declining over the 1990s. The share of accounts with credit limit up to Rs 25,000 fell from around 94 per cent in 1994 to 71 per cent in 2001.
In value terms, the share of outstanding credit below Rs 2 lakh has fallen from about 30 per cent in 1994 to about 19 per cent in 2001, while credit accounts with limit more than Rs 10 crore have increased by more than 535 per cent between these two years.
This indicates that banks are increasingly looking for business with lower handling costs and that the lower bank rates have not helped smaller borrowers, the issue says.
