Banks Allowed To Set Separate Plrs For Loan, Cash Credit

The Reserve Bank of India (RBI) has permitted scheduled commercial banks to prescribe prime lending rates (PLRs) and spreads over the PLRs separately for the loan component and the cash credit component with a view to encouraging borrowers to switch over to the loan delivery system.

The Reserve Bank has made this change through a circular dated February 12 to all commercial banks.

At present, scheduled commercial banks are free to determine their own lending rates on advances with credit limits of over Rs 2 lakh.

Banks are required to declare a prime lending rate which will be the minimum rate charged by the banks for credit limits of over Rs 2 lakh.

They are also required to announce the maximum spread over the prime lending rate for all advances other than consumer credit.

Banks are being encouraged to switch to the loan delivery system in an effort to wean borrowers away from the cash credit component.

The idea is to minimise the tendency of borrowers to misutilise their drawing entitlement against their non-core current assets which forms the cash credit component of their current assets.

By definition of current assets, the cash credit component is meant to be valid for a period of one year only.

But, as it is only the core component of current assets which remain in the business, it is difficult to keep track of the use to which the funds borrowed against non-core assets are being put.

Borrowers often misutilise the cash credit component by siphoning off funds to long-term projects or to subsidiaries or, more usually, for speculative purposes.

The idea obviously is to take advantage of the fact that banks usually provide incentives on short term borrowing in the form of lower interest rates than those charged for medium and long term borrowings as the turnover of funds is greater in the first case and the risk is also lower.

To prevent this, borrowers now having to adhere to the quarterly information system whereby, every quarter, they are required to furnish the results of the past quarter, the estimates for the coming quarter and changes, if any, in their drawing power with respect to the cash credit component.

This revision in the central banks policy is also meant to enable banks to shift their borrowers away from resorting to cash credit loans.

It is not, however, clear that banks will be willing to take advantage of this facility.

A senior bank officer pointed out that such prescription of separate prime lending rates would only lead to greater confusion and hardship on the part of the borrower.

He pointed out that it would be advisable to declare only one prime lending rate for both the components but to charge different interest slabs for advances in different components and for different periods.