Interest Rate Policy

The Continuity Constant

 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:

 

 

actual cost of funds,

operating expenses and

a minimum margin to cover regulatory requirements of provisioning and capital charge, and profit margin.

 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.

 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:

 

 

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.

 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.

 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.

 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.