Bankers say multiple PLRs to enhance lending transparency

The multiple prime lending rate (PLR) system with a cap on advance rates, which are likely to be recommended by a Reserve Bank of India (RBI) panel, would bring more transparency in the lending operations, bankers said.

"This (a ceiling on the sub-PLR advances) is a welcome move. Capping the sub-PLR loans will help to avoid undue competition in the market. There will be more transparency and relevance to BPLR mechanism in the industry," Union Bank of India DGM Corporate Banking R G Kelkar told PTI here.

At present larger banks, with deep pockets, woo prime- customers offering loans at very lower rates, thereby putting pressure on their smaller competitors.

Discriminating pricing of wholesale and retail loans will help to develop more customer-confidence. The double-PLR system will also help banks to price their advances in a better way, Kelkar said.

The RBI panel, headed by RBI Executive Director Deepak Mohanty and comprising external experts and Indian Banks Association, is understood to have mooted two PLRs — one for retail and one for wholesale borrowers in its draft report — which is most likely to be inducted in the final report.

The RBI-group is likely to submit its report to apex bank Governor, D Subbarao by the end of this month.

"There is a possibility that banks may maintain their retail PLR at around 12 per cent. Ideally, the wholesale benchmarking could be 200-300 basis points below this," Kelkar said.

The RBI constituted a special working group to revisit the existing PLR structure in July to bring more transparency and uniformity in the manner in which banks arrive the PLR.

Kotak Mahindra Bank's head retail liabilities K V S Manian said many private sector banks already have the system of double PLRs and a regulation in this effect is unlikely to result in any major impacts in the industry.

"This is not going to cause any major changes in the market, as banks will adjust their PLRs in such a way not to lose the prime customer-base," Manian said.

However, a senior official with IDBI Bank, said if banks are asked to curb their sub-PLR loans, it may hit their asset book. "Interest rates are determined by the market. If banks are asked to curb their sub-PLR loans, this will affect the business of banks, as potential clients may move to other lenders offering lowest rates," the official said.

Though the exclusion of home loans from the PLR's fold was under consideration, the working group is unlikely to accept this suggestion as it feels that double PLR system will alone help to bring transparency in banks' lending, sources said.

Once RBI puts a ceiling to the sub-PLR advances, banks cannot lend to potential customers at very lower rates beyond a percentage of their total incremental advances.