Sub-PLR lending may soon cease
By Neelima Shankar
Jun 10, 2009
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In an attempt to bring transparency in the overall lending process, the Reserve Bank of India may refrain the banks from lending below the benchmark prime lending rates (BPLR) in near future.

Quoting an RBI official, "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."

The final decision is set to be made by the end of July this year, before which the regulator will have a discussion with the bankers on the matter.

Consequent to this, the rates on loans benchmarked to PLRs will be reduced. Loans with a specified floor rate, however will not witness the interest rate change and sub-PLR borrower may not benefit from it.

Many banks taking hints from the regulators, have been considering ceasing the lending below BPLR. The chief managing director of Corporation Bank, JM Garg, confirmed, "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."

SK Goel, CMD of UCO Bank, said,"We will take a decision on this on June 19."

Earlier, KC Chakrabarty, chief managing director, PNB had asked the banks to refrain from lending below BPLR, except for the exporters and farmers, where regulatory forbearance may be considered.

Chakrabarty has been formally notified by the union, for appointment as the deputy governor of Reserve Bank of India (RBI).

Presently, more than 80 percent of the lending takes place at below benchmark rates. The benchmark prime lending rates (BPLR) is the rate used by the banks for fixing the floating component of the loans. It is calculated on the basis of several variables including NPAs, cost of funds and operating costs. The BPLR policy, once into effect will enable the banks to offset the lower earnings on the advances and will help the banks in maintaining a healthy net interest margin.

Currently, the net interest margin of the banks like Oriental Bank of Commerce and Central Bank of India is below 3 percent.

The net interest margin is calculated as the ratio of the net interest income to the average total assets.


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