RBI aims for transparency, may not allow sub-PLR loans

NEW DELHI: The Reserve Bank of India may standardise the way banks calculate their prime lending rates (PLR) ��� the benchmark to fix the floating components of loans ��� and bar them from lending below their respective PLRs as it looks to bring more transparency into the whole process, two senior RBI officials told ET.

A decision on this can be expected by the end of July, the officials said on condition of anonymity.

More than 80% of current lending is sub-PLR. Post- the RBI decision, interest rates on loans benchmarked to PLRs will move down, unless the loan agreement has specified a floor rate.

RBI is expected to hold detailed discussions with banks before making a final decision. PLR is calculated by factoring in variables including cost of funds, non-performing assets and operating costs.

���In mid-May, we appointed an internal committee to chart out a transparent and effective mechanism for calculating benchmark prime lending rate. Once we put this method in place, we plan to ask all banks to follow it for calculating PLR and dissuade them from lending below it,��� said an RBI official.

Officials at four public sector banks that ET spoke to said they may stop giving sub-PLR loans by the month-end.
Net interest margin ��� the ratio between net interest income and average total assets ��� of nine small public sector banks is already below 3% while banks like Central Bank of India and Oriental Bank of Commerce have margin of less than 2.5%. By repricing deposits and stopping lending below PLR, banks are expecting to maintain net interest margin and offset lower earnings on loans benchmarked to it.

JM Garg, CMD of Corporation Bank, confirmed that the bank is looking at ceasing sub-PLR loans. ���We are considering stopping loans below benchmark prime lending rates. We will decide after seeing how the market is reacting to Punjab National Bank���s step,��� said Mr Garg.

Some banks are expected to take a call on this in the next two weeks. ���We will take a decision on this on June 19,��� said SK Goel, CMD of UCO Bank. Punjab National Bank, which has a PLR of 11%, the lowest in the country, had earlier directed its officials not to lend below PLR. Its CMD KC Chakrabarty, whose appointment as the RBI deputy governor is notified, had earlier asked the central bank to stop lending below PLR.

In pre-policy credit meeting between central bank and bank chiefs, Mr Chakrabarty had conveyed his concerns about lending below PLR and had demanded regulatory forbearance for sub-PLR loans other than for exporters and farmers.