RBI for clarity in fixing benchmark rates

The Reserve Bank of India (RBI) feels that the concept of arriving at benchmark prime lending rates (BPLR) needs to be made more transparent. Currently, the fixing of BPLR is arbitrary than rule-based, according to the central bank.

In its Report on Currency and Finance 2005-06, the RBI said, "Though the RBI has been advising banks to evolve their own BPLR by taking into account the cost of funds, transaction cost and reasonable cover for the riskiness, fixation of the BPLR continues to be more arbitrary than rule based."

The PLRs of five largest banks have increased to 12.75-15.75 per cent from 10.25-12.75 per cent a year earlier. Although interest rates are market-determined, some downward stickiness has been observed in banks' BPLR. Around 82 per cent of bank lending is at sub-PLR rates, which is a cause for concern.

Lending at rates below the BPLR, lacks transparency, affecting both the borrower and the lender, said the RBI.

Secondly, banks charge other segments higher rate of interest to compensate for sub-BPLR lending, leading to cross subsidisation of the economically well-off borrowers by the economically poor borrowers.

While rated corporates can avail of credit at sub-BPLR rates, the agriculture and small scale industries (SSIs) sectors and other borrowers, in general, are charged BPLR or in some cases even higher rates.

According to the All India Debt and Investment Survey 2002, about 82 per cent of the rural debt at the end of June, 2002 was in the interest range of 12 to 20 per cent, while prime lending rates of banks were in the range of 11 to 12 per cent.

The administered interest rate applies only to agricultural loans up to Rs. 2 lakh and export credit. Banks can also extend short-term production credit to farmers up to Rs 3 lakh at an interest rate of 7 per cent on which the government extends 2 per cent interest subsidy to banks.