Others raise sub-PLRs

Close on the heels of the finance ministry advising some public sector banks to keep in abeyance the hike in their prime lending rates (PLRs), a string of PSU banks "" including some large ones "" last week increased their lending rates for corporations by as much as 1 percentage point.

This was done by hiking the rates at the sub-PLR level, and keeping the PLR unchanged.

"This is the only way to keep one's net interest margin intact. We do not want to be seen as hiking our lending rates, but at the same time we need to prop up our interest income as the cost of deposits is going up," said a senior banker.

As a result of this move, lending rates for some of the firms will climb back to double digits after a gap of four to five years. Some blue-chip corporates had enjoyed interest rates as low as 6 per cent for short-term loans over a year back.

Banks are also pushing for a differential PLR system, whereby the industry will have sectoral PLRs. The Indian Banks' Association (IBA) is expected to take up the matter at its management committee meeting on August 11.

Banks have been asking the Reserve Bank of India (RBI) to let them have different PLRs for different sectors and tenures, so that a change in market dynamics in one segment allows them to price the risk accordingly, instead of raising rates across the board, as happens in the present system.

In October 2005, the RBI had 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 central bank had asked the IBA to review the BPLR system, and come up with recommendations.