Sub-PLR borrowers do not benefit with PLR reductions
By Vaibhav Aggarwal
Jan 15, 2009
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Although the prime lending rate (PLR) for most banks have declined but it dose not mean that all PLR linked loan rates are also reduced. Some PSU banks in the industry have not cut the rates for their sub-PLR corporate borrowers.

With the aim to protect their margins, some banks have not been passing on the benefits of PLR reduction to these customers. Banks informed that after cutting their lending rates, their margins had come under pressure. They had evaluated that interest rates on some existing sub-PLR loans do not even cover the costs and therefore to reduce the interest rate further would mean more pressure on their margins.

Hence banks are forced to revise their loan contract with some sub-PLR borrowers by using a "force majeure" clause which means situation beyond control. Some mid-sized PSU banks are known for following this practice of not passing the benefits of PLR reductions to these customers.

A senior executive with a PSU bank said, "We are trying to devise ways to protect our margins. We plan to ask select borrowers to change the spread below PLR at the time of annual review of the account. But, we have no intention to change the terms before the annual review."

UCO Bank Managing Director, SK Goel informed that banks normally use ‘minimum clause' in order to avoid free fall of interest rates. This clause states that a sub-PLR rate would not fall below a certain level even if the PLR continues to fall. "I don't know whether any bank is violating the loan contracts. In case of Uco Bank, we are passing on the benefits of rate cuts to all our borrowers," he added.

Meanwhile many corporates to whom loans have been extended at sub-PLR rates complain that the PLR reduction benefits have not been passed on to them despite that they fall outside boundary of ‘minimum clause'.

A Managing Director of housing finance company (HFC) said, "We are fighting with our bankers. Banks said they will not pass on the benefit of rate cuts to the floating rate borrowers who have taken loans at below PLR. Unless we get the benefit, we will be left with no option but to take up this issue with Reserve Bank of India."

In fact some more HFC firms have also been trying to bargain with their respective bankers regarding the matter.


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