RBI frowns on sub-PLR loans, bankers resist

The Reserve Bank of India (RBI) is against lending by banks below their benchmark prime lending rates (BPLRs) — a stance that has met with stiff opposition from bankers.

The central bank’s committee on BPLR review, which met last week, was of the view that the practice of lending below BPLR needed to be discouraged in order to make pricing of risk more transparent.

According to a banker who attended the meeting of the panel, which is headed by RBI Executive Director Deepak Mohanty, the central bank was of the view that core deposits of the banks should not be used for lending below the prime lending rate.

About three quarters of the bank lending happened at sub-BPL rates, while core deposits constituted around 80 per cent of banks’ total deposits. Deposits having tenure of more than one year are considered core deposits which gives stability to a bank’s liability portfolio.

Over the last few months, RBI has made known its concerns over lending below BPLR and had set up a committee to review the structure.

However, bankers have pointed out since BPLRs of banks were very high with some having it at around 16 per cent, it will be difficult for banks to disallow sub-PLR lending.

“If a bank has surplus liquidity, then instead of lending it to call market or parking in the reverse repo tender for 3.25 per cent, banks can deploy resources on short-term basis for 7 per cent,” a banker who attended the meeting said.

Another banker said that large companies might be unwilling to borrow for the short term at the prevailing BPLR.

On the issue of separate BPLR for retail and wholesale customers, there seemed to be disagreement among RBI officials, sources said. “Some RBI officials feel that separate benchmark is not a good idea as pricing should be done on the basis of risk perception of the borrower and not on whether it is corporate or retail,” sources said.

A section of the committee members suggested separate BPLRs for retail and corporate sectors with the former BPLR at a higher level than that for companies. Though most of the Indian banks presently have one BPLR, ICICI Bank has two benchmark rates for its retail and corporate clients. However, ICICI Bank’s retail BPLR is lower than its corporate benchmark.

The committee has already missed one deadline for submitting the report which was extended by a month to end September. IBA Chief Executive K Ramakrishnan had said that the report would come out by the end of the month.

After the last week’s meeting, RBI has referred back its suggestion in the form of a draft report to the Indian Banks’ Association which is seeking further feedback from banks.

Based on the IBA recommendations, the committee is once again scheduled to meet by the middle of this month.