Former RBI Deputy Governor S S Tarapore said bank should stop lending at below prime rates as such practices are faulty and lead to high benchmark rates.
"There is a faulty system of a PLR. In practice, almost three-fourths of bank lending is at rates below the PLR. This is an unsatisfactory arrangement and lacks transparency," Tarapore said at a seminar here.
Under the present system, if PLR (rate at which they give loans to preferred clients) is 11 per cent, choice customers may receive credit at rates as low as 5 per cent, he said.
The arrangement is that when banks have surplus funds, rather than parking these funds at the reverse repo rate of 3.25 per cent banks prefer to lend to preferred customers at about 5 per cent, he said.
"Banks should be required to declare that BPLR and there should be a strict stipulation that absolutely no credit can be provided at sub-PLR rates," Tarapore said.
Also, the Reserve Bank should take initiatives to fix the interest rates for exports and small loans outside the ambit of the PLR, he said.
Reserve Bank, which had appointed a committee to examine the issue, should ask for an interim report from the committee before the July 28, 2009 policy, Tarapore said.
"The dangers of delaying a decision on this matter is that pressures to reduce lending and deposit rates would be difficult to ward off," he said.
