No Bank Rate cut seen in Oct policy, but PLRs may take a plunge

NEW DELHI: Further reduction in RBI’s Bank Rate is unlikely from the present 6 per cent in the busy season credit policy in October end, but prime lending rates of major commercial banks may see a downward movement. Although the central bank has been asserting that “soft interest rate bias� would continue, bankers see no necessity in further reduction in Reserve Bank’s benchmark refinance rate as there was excess liquidity in the system. “Bank Rate cut is not necessary. But it all depends on RBI, which has so far maintained a soft interest rate bias,� HDFC Bank managing director Aditya Puri said. RBI had slashed Bank Rate by 0.25% to 6% in its slack season credit policy in April, while lowering repo rate by 0.5% last month.
Although Bank Rate has been reduced significantly in the last five years, PLRs of banks continue to be in the range of 10-11%.
To make PLRs realistic, RBI along with Indian Banks Association is working on a “benchmark PLR� for banks, which may result in 1-2% reduction in the lending rates of some of the banks who are charging borrowers a much higher rate now. The benchmark PLR would be based on various parameters like actual cost of funds, operating expenses and gross non-performing assets of banks, Oriental Bank of Commerce chairman BD Narang said. Each bank will have its own benchmark PLR based on various financial parameters. Ultimately these moves will benefit the borrowers, a top Uco Bank official said. RBI had announced in April credit policy that the benchmark PLR based on a bank’s actual cost of funds, operating expenses, cost of capital, default premium (or NPA) and term premium and profit margin, would make lending rates realistic.
The benchmark PLR will be introduced in place of tenor-linked PLR, which RBI decided to discontinue.