Differential PLRs under RBI scanner

In a move to bring more transparency into the pricing of loans, the Reserve Bank of India in its pre-credit policy meeting has sought data from all banks on differential prime lending rates (PLRs) charged to the customer.

Currently, for different kinds of loans, many banks have a different benchmark rate. For instance, some have a separate home loan PLR, an auto loan PLR, etc. Earlier, the apex bank had wanted the banks to have one benchmark PLR (BPLR) and charge a spread over that depending on their cost of funds and margins.

And the October-end credit policy may see the central bank reiterate the need to maintain a single BPLR and disclose cost details to the customer while charging an interest rate for a particular loan, especially in the floating rate segment.

Typically, the cost structure works something like this. The bank sets a mortgage specific rate, popularly known as the rack rate, in say the home loan PLR, of 14 per cent. Accordingly, loans are disbursed at 10-11 per cent depending on the cost of funds and margins. However, though the cost of funds does not change for different kinds of loans, it was observed there are many different PLRs for different loans especially in the floating rate segment.

Also, since all the benchmark rates are different, the customer often finds the cost structure convoluted because there isn't any transparency in it. Banking sources say that the move is especially targeted towards banks where this practice of differential rates is rampant. For instance, sources say that some banks have benchmark floating rates even for the same kind of loan. That is, one for old customers and one for the new ones.

Sources said, "Ideally banks should follow one BPLR and then price all the other loans based on that."

For term loans for over a certain period, a general thumb rule can be followed where the customer is charged an additional premium (50 to 75 basis points). Also, experts say that the benchmark rate should be ideally linked with the fixed deposit as it would clearly indicate how much the bank is paying to its deposit holders.

Banks, in this pre-credit policy discussions with the RBI, have expressed their difficulty to assess the cost of funds from different segments of their loans portfolio and thus to have a single BPLR. Also, the risk pricing for some have gone haywire as they have lent to "not so credit-worthy customers".

Add to that, frequent rises in the interest rates have increased the burden on customers leading to more defaults. As a result of which some banks have to face the problem of rising NPAs in the retail assets.