IBA panel to debate rate issue

The 25-member management committee of the Indian Banks' Association (IBA) will take up for discussion the finance ministry's directive to five public sector banks (PSBs) on keeping in abeyance hikes in prime lending rates (PLRs) tomorrow.

The panel comprises chief executives of banks from public, private and foreign and co-operative sectors.

IBA chief executive H N Sinor, said, "The directive on PLR issue is not on the agenda for tomorrow's management committee meeting. But since the matter has become a very hotly debated topic, the association will like to see what the collective view emerges (among bankers)."

IBA's future course of action would depend on the views of the panel members, Sinor said. Three banks "" State Bank of India, Bank of Baroda (BoB), and Andhra Bank "" which were among the five banks which received the ministry of finance's directives stuck to their PLR hikes, while Oriental Bank of Commerce (OBC) partially rolled back the increase in its home loan rates.

The committee is also expected to resolve for a quick implementation of a differential PLR system for various sectors or customer groups.

About having a differential PLR system which will allow banks to have sectoral PLRs, Sinor said "IBA has already recommended a system of sectoral PLRs to the RBI. The recommendation also states that the decision on the number of PLRs should be left to individual banks. The association is awaiting a response from the RBI."

In October 2005, the RBI had asked IBA to review the BPLR system, and come up with recommendations. RBI had then admitted that the system of benchmark PLR did not fully meet the expectations of pricing of credit according to risk assessment, so that both credit delivery and quality improved.

Competition forced banks to price a significant proportion of loans far out of alignment with PLRs, and in a non-transparent manner. As a consequence, this undermined the role of the PLR as a reference rate.

The RBI also felt that the non-transparent manner in which banks priced loans was leading to a public perception that there was underpricing of credit for big corporates.

The practice of having one PLR for all classes of loans has lost its relevance due to competition and difference in the business strategies in terms of segment focus and the pattern of fund mobilisation.

Many banks already have separate reference rates for mortgages and corporate loans, a senior private bank official said.