The Hindu : Banks advised to fix realistic PLR

Online edition of India's National Newspaper
Wednesday, Apr 30, 2003

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Business

Banks advised to fix realistic PLR

By Our Special Correspondent

MUMBAI APRIL 29. In order to enhance transparency in banks' pricing of their loan products as also to ensure that prime lending rates (PLRs) truly reflect the actual costs, the Reserve Bank of India Governor, Bimal Jalan, today advised banks to consider actual cost of funds, operating expenses and a minimum margin to cover regulatory requirement of provisioning and profit margin, while arriving at the benchmark PLR.

Banks should announce a benchmark PLR with the approval of their boards, Dr. Jalan said while announcing the Monetary and Credit Policy for 2003-04. He also said that since all other lending rates could be determined with reference to the benchmark PLR arrived at as advised by the RBI in this Policy, by taking into account term premia and risk premia, the system of tenor-linked PLR deserves to be discontinued. These premia can be factored in the spread over or below the PLR.

The effective date for discontinuation of the tenor-linked PLR will be further discussed with banks and a decision will be announced separately in due course. As is already the case, the benchmark PLR would continue to be the ceiling rate for credit limit up to Rs. 2 lakhs.

The RBI Governor further advised that in the interest of customer protection and to have greater degree of transparency in regard to actual interest rates charged to borrowers, banks were urged to continue to provide information on maximum and minimum interest rates charged together with the benchmark PLR. The system of determination of benchmark PLR by banks and the actual prevailing spreads around the benchmark PLR would be reviewed in September 2003.

In view of the increasing demand for housing in rural and semi-urban areas, and to improve financing to the housing sector in these areas, Dr. Jalan proposed that banks, with the approval of their boards, will be free to extend direct finance to housing sector up to Rs. 10 lakhs in rural and semi-urban areas as part of the priority sector lending.

The RBI Governor said that certain relaxations relating to regulatory and prudential aspects have already been given to banks to boost credit flow to the infrastructure sector. These include enhancing the scope of definition of infrastructure lending, relaxing the prudential single borrower exposure limit to 20 per cent of capital fund and assigning a concessional risk weight of 50 per cent on investment in securitised paper pertaining to an infrastructure facility.

The RBI Governor said that in order to further mitigate the hardship of farmers in drought affected States, the Government had decided, as a one-time measure, to waive completely, the first year's deferred interest liability on kharif loans in those States. The deferred interest, to be waived by banks, would be reimbursed by the Government. No interest would be charged on the deferred interest and the balance of the deferred interest would be recovered in reasonable investments.

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