The Reserve Bank of India (RBI) On Thursday said it had set up a working group on reworking the benchmark prime lending rate (BPLR) mechanism to ensure more transparent pricing of loans by banks.
The group, to be headed by the RBI Executive Director Deepak Mohanty, would look at the best international practices and suggest an appropriate loan pricing system.
It would also review the administered lending rates for loans up to Rs 2 lakh given to exporters, which bankers say affect their ability to price risk efficiently.
The terms of reference of the group also include the concept of BPLR and the manner in which banks arrive at it, besides examining the reasons for divergence in prime lending rates of major banks.
The committee would also suggest a suitable benchmark for floating rate loans in the retail segment, which are usually extended at a discount of 2.5-3 percentage points to the BPLR.
While seeking public comments up to June 19, the RBI, in a public statement, said the review was announced in the Annual Policy Statement in April this year. To enhance transparency in pricing of loans by commercial banks, the concept of BPLR was introduced in November 2003.
In the Annual Policy Statement for 2009-10, the RBI had said that “over time, the system of BPLR has evolved in such a manner that it has lost its relevance as a meaningful reference rate as bulk of loans are advanced at below BPLR. Furthermore, this impedes the smooth transmission of monetary signals and makes the loan pricing system non-transparent”.
While the central bank has lowered key policy rates by up to 400 basis points since October 2008, the BPLR reduction by banks such as State Bank of India and ICICI Bank has been to the tune of 150 basis points.
At present, Punjab National Bank, the New Delhi-headquartered public sector player, has the lowest BPLR of 11 per cent, and has reduced the benchmark rate by 300 basis points since late last year.
On their part, bankers maintained that the BPLR was irrelevant as nearly three quarters of lending was taking place at rates that were below the benchmark.
Ideally, the most creditworthy customers should get credit at BPLR. Even in the US, which follows a prime rate, the most creditworthy customers are supposed to access loans at that rate, but the reality is quite different.
Apart from Mohanty, the committee will have representatives from the Indian Banks’ Association, the Banking Codes and Standards Board of India, banks and external experts, the RBI said.
