Retail borrowers need to get regulatory support to bargain

Retail customers lose out since they don���t have the muscle power to bargain for lower rates once they sign loan documents, says PNB chief KC Chakrabarty, who takes over as RBI deputy governor today.

After having worked with commercial banks for over 30 years, KC Chakrabarty will take charge as deputy governor of the Reserve Bank of India (RBI) on Monday. In his exit interview with Sangita Mehta as chairman and managing director of Punjab National Bank, Mr Chakrabarty strongly advocates that banks do away with sub-PLR lending, pass on the benefits of softer rates to old customers and not restrict them to new customers alone. Known for his strong views, Mr Chakrabarty spoke to ET on a range of issues, from home loans to tackling sticky assets.

Why did you decide to do away with sub-PLR lending. How was your experience?

By definition, PLR means the best customer gets the best rate. The sub-PLR concept should not exist. Our interest rate structure is not fully market-determined, and, added to it, there is regulated lending. Distortion has crept in over a period of time, especially when interest rates were softening.

This distortion has become so complicated that it is not transparent and fair to customers. As a banking
institution, we wanted to be fair, and therefore, decided to do away with sub-PLR lending. If I am willing to give a lower rate to a good customer, I must bring down the PLR.

There are some problems due to the mandated lending rate structure. And hence, I had requested the government and RBI to discontinue sub-PLR lending. Mandated lending should not be at sub-PLR rates. If the government wants customers to get softer rates, it should give subvention. And I don���t see why other banks can���t do away with sub-PLR, because globally that is the concept. Working capital and long-term lending should not be at sub-PLR rates. Short-term lending (3-6 months) can be at any rate.

Do you expect other banks to follow PNB���s footsteps in doing away with sub-PLR rates?

Banks that want to give fair and transparent pricing to customers should follow the PLR structure.

Some banks charge higher rates to old customers and simultaneously offer lower rates to new customers despite both having opted for floating-rate loans. What can be done to improve transparency in home loan pricing?

In my opinion, a bank cannot offer differential rates to old and new customers if both have taken floating rate loans. That is international best practice. What needs to be seen is how floating rate loans are determined. The reference rate (PLR) should be made transparent and we must study whether it is moving in tandem with g-sec and other rates. A home loan rate on which the reference rate is not very transparent is floating.

Loan documents of all banks specify that home loans are linked to PLR. But I don���t agree. While the PLR has come down to 12% from 14%, have banks reduced home loans rates by 2%? Next, one has to analyse whether the floater is moving vis-��-vis other rates. Here, retail customers are losing out because they do not have the muscle power to bargain for lower rates once they have signed loan documents.

That muscle power should be provided by the regulatory system, the legal system and code of ethics. The law should protect retail customer. We not only have to ensure that retail loans are linked to a floater, but that this floater moves in tandem with other rates. A legal and regulatory system should be in place to protect retail customers.

You have requested RBI to discontinue sub-PLR lending. How will this work out, given that thousands of loan agreements have been signed and can���t be revoked?

At least, the future loan agreements should not be sub-PLR. Besides, all loan agreements will end some day. If this comes as a regulatory directive, banks need not worry as our interest rate structure is subject to regulatory provisions. I had, therefore, urged the regulators to prohibit sub-PLR advances. Disbursing working capital loans at sub-PLR rates can also be stopped immediately.

What are your views on interest rates?

I have stopped forecasting interest rates. But we are still in a benign interest rate regime and the next trigger will lead to a rise in rates. I don���t know when that trigger will happen.

How do you view the concern in some quarters that the bank���s balance sheet for FY09 does not disclose the true position of stressed assets due to the one-time restructuring allowed by RBI. And will NPAs increase, going forward?

When the entire world is going through the most unprecedented crisis in financial history, borrowers will face problems and that���s why this kind of restructuring was allowed. Once the economic situation improves, companies that have been given restructuring packages will return to health and banks will have no problems. Many of the units that received support will definitely move into the black, when the economic health is restored. Companies that fail to recover will become NPAs and banks will have to absorb the shock. This does not mean that we will not help ailing units in difficult times.

How will this impact the balance sheet?

That will depend on the extent of recovery.

What reforms have you outlined for RBI? What���s your priority?

I am the PNB chairman, as of today, and will think of RBI, only after joining it.