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RBI to review BPLR regime

The Reserve Bank of India (RBI) has sent out a strong message to banks that there are inadequacies in the manner in which interest rates on loans are fixed.

business Updated: Apr 23, 2009 11:00 IST
Radhika Pancholi

The Reserve Bank of India (RBI) has sent out a strong message to banks that there are inadequacies in the manner in which interest rates on loans are fixed.

The central bank, which voiced its displeasure on the evolution of the current benchmark prime-lending rate (BPLR) system followed by banks, has announced the formation of a working committee to review the system.

“The system of BPLR has evolved in such a manner that it has lost its relevance as a meaningful reference rate as bulk of loans are advanced below BPLR,” D Subbarao, governor, RBI said in a policy announcement.

The working group, which would review the present BPLR system and suggest changes to make credit pricing more transparent, would present its report to all stakeholders by the end of August.

“While many banks have reduced interest rates to some extent since October 2008, most of them extend loans to bigger customers at rates that are much below their existing BPLR and that has prompted RBI to review the system,” said Arun Kaul, treasurer, Punjab National Bank.

“What the RBI has done is correct,” said PL Gairola, chairman Dena Bank, adding that the existing PLR system was losing its relevance.

The reduction in BPLRs by most public sector banks was in the range of 125-200 basis points, followed by 50-150 basis points reduction by most private sector banks and 50 basis points reduction by foreign banks.

The central bank says banks must strive to reduce lending rates further as current deposit and lending rates are now higher than in 2004-2007, although the policy rates are now lower than in that period.

“Some arguments of banks are valid and some are not,” Subbarao said. “Reduction in public sector banks deposit rates in 1-3 year maturity from 9.50-10.75 per cent in October 2008 to 7.00-8.75 per cent by April 2009 has not been commensurate with the moderation in inflation. Judging from the experience of 2004-07, deposit rates can be lower and should come down.” The
same could be done with lending rates, he felt.

In its efforts to increase liquidity, RBI is also looking at paying interest on savings accounts on a daily basis instead of the current trend of paying it monthly.

“Before core banking was introduced the move would have been very challenging, but now it would be possible to give interest on a daily basis to savings account holders. However, it would marginally also increase the cost of funds for banks,” said V Santhanaraman, executive director, Bank of Baroda.