With a view to bring in a greater transparency in interest rate structure and pricing, Punjab National Bank (PNB) has decided to stop lending below the benchmark prime lending rate (PLR).
The decision has been taken amid an intense discussion over the loan pricing in the industry. "We have prohibited all our officers from lending below PLR. The rationale is to be equitable to all customers, particularly those who have lower bargaining power," said KC Chakrabarty, Chairman, PNB.
Making PLR the floor rate for lending would be a significant move as about 75% of the banks loans are extended at below PLR level. Lending below the PLR was permitted by the central bank nearly six years back. However over the years PLR has lost its significance as corporates demanded for loans at lower rates. As a result, the banks competed against each other to extend loans at rates below the PLR, also known as the sub-PLR loans.
However the practice did not moved in line with the RBI's policy objectives. The signal related to rates that the central bank often sent was not adequately transmitted in the banking system.
Meanwhile PNB has directed its officials not to disburse loans below PLR. The bank has decided that any sub-PLR loan will have to be approved from the CMD's office before its sanction.
Even though PNB has taken such a move but the interest rate of the bank is going to be competitive as its PLR stand at 11% against the PLR of other banks that mainly hover around 12%. For instance SBI has a PLR of 12.25%.
However the PLR direction of the bank would not apply to lending that is directed by RBI. For example loans to farmers and exporters will continue to be at sub-PLR rates. Even housing loans and education loans will be given at rates below PLR. Further PNB officials said that outside these categories, nearly 90% of the loans of PNB are at PLR or above PLR level.
The Chairman of PNB urged RBI to remove the sub-PLR lending because it creates inconsistency in the system. The view was put forward by the bank's chairman during the pre-credit policy meeting between the central bank and banks' chiefs.
Meanwhile in order to make the policy decisions more effective, the regulator also emphasized the need to review the mechanism for fixing the PLR.
Ever since the RBI starting cutting down its short-term rates and cash reserve ratio from October 2008, banks have been lowering their PLRs.