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In the annual policy Statement of April 2003, banks were advised to announce a benchmark PLR with the approval of their Boards, taking into consideration:
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| actual cost of funds, operating expenses and a minimum margin to cover regulatory requirements of provisioning and capital charge, and profit margin. |
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| It was also indicated that the system of determination of benchmark PLR by banks and the actual prevailing spreads around the benchmark PLR would be reviewed in September 2003. |
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Accordingly, the issues relating to the implementation of the system of benchmark PLR were discussed with select banks and the Indian Banks Association (IBA). The IBA has made the following suggestions:
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| permitting separate PLRs for working capital and term loans, continuation of the practice of multiple PLRs, flexibility in offering fixed or floating rate loans based on time-varying term premia and market benchmarks, flexibility in pricing of consumer loans, and accounting for transaction costs for different types of loans. |
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| It is clarified that since lending rates for working capital and term loans can be determined with reference to the benchmark PLR by taking into account term premia and/or risk premia, a need for multiple PLRs may not be compelling. |
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| It is also clarified that banks have the freedom to price their loan products based on time-varying term premia and relevant transaction costs. Banks may price floating rate products by using market benchmarks in a transparent manner. |
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| As IBA has indicated broad agreement with the approach proposed for the benchmark PLR, IBA may advise its members suitably, keeping in view the operational requirements. |
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