Scrap PLR and bring base rate: RBI Panel


Mumbai: Before the half-yearly review of monetary policy, an internal panel of the Reserve Bank of India (RBI) has suggested banks to scrap the concept of prime lending rate (PLR) or the rate at which banks are expected to lend to their top-rated customers and the mandated concessional rate for small loans, reports Mint. The panel has already submitted its report and RBI is expected to put this up on its website this week, ahead of its 27 October half-yearly review of monetary policy, for public comments. The panel, chaired by RBI Executive Director Deepak Mohanty, was formed in June to review the PLR system and suggest an appropriate loan pricing system. Its mandate also includes a review of administered lending rates. The panel has suggested to scrap PLR and replace it with a 'base rate' and said that no bank should be allowed to lend below this rate. Only short-term loans of up to one year and working capital loans to companies can be given below the base rate. The six-member panel includes Jahangir Aziz, India Chief Economist of JP Morgan Chase, T.T. Ram Mohan, Professor at the Indian Institute of Management, Ahmedabad, and representatives from RBI and the Indian Banks Association, the apex bankers' lobby, among others. The base rate will take into consideration of a bank's cost of deposits, cost of operations and the margin that a bank needs to keep between the cost of funds and return on advances to make profits. It will also factor in other critical operational aspects such as the cash reserve ratio (CRR) or the portion of deposits that banks need to keep with RBI and on which they do not earn any interest and non-performing assets (NPAs). Currently, banks are required to keep five percent of their deposits with RBI as CRR. Currently, rates of all small loans given to agriculture and small-scale industries are mandated at seven percent, much below banks' PLR. Such loans are given at seven percent and the government offers a three percent subsidy to banks on such loans through a budgetary provision. Besides, loans to exporters are also given at 2.5 percent below a bank's PLR. Collectively, such loans account for about one-third of a bank's loan book. PLRs of public sector banks currently vary between 11 percent and 13.25 percent, and some private banks charge as much as 15.75 percent. Banks keep their PLR at an artificially high rate, otherwise their earnings on some of the loans linked to PLR, such as export loans, will go down. This means that no company will be able to access medium and long-term bank loans at below nine percent. Such a move will not make much difference to top-rated firms as they anyway access money at below PLR, but it will make the system transparent.