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Prime rates to be monitored

Mumbai, April 29: In a move to ensure that benefits of softer interest rates are passed on to borrowers, the Reserve Bank has proposed to review the system of determination of benchmark prime lending rates (PLR) by banks and the actual prevailing spreads around the benchmark PLR in September 2003.

The spreads for banks essentially mean the difference between its borrowing costs for funds and its lending rate.

At present, commercial banks decide the lending rates to different borrowers (with credit limit of over Rs 2 lakh) subject to the announcement of PLR as approved by their boards.

In order to enhance transparency in banks’ pricing of their loan products as also to ensure that the PLR truly reflects the actual costs, banks are advised to consider the following suggestions for determination of their benchmark PLR.

RBI said banks should take into account their actual cost of funds, operating expenses and a minimum margin to cover regulatory requirement of provisioning/capital charge and profit margin while arriving at the benchmark PLR.

Banks should announce a benchmark PLR with the approval of their boards. As is already the case, the benchmark PLR would continue to be the ceiling rate for credit limit up to Rs 2 lakh, RBI said.

Since all other lending rates can be determined with reference to the benchmark PLR arrived at, as above, by taking into account term premia and/or risk premia, the system of tenor-linked PLR may be discontinued, RBI added.

These premia can be factored in the spread over or below the PLR. The effective date for discontinuation of the tenor-linked PLR would be further discussed with banks and a decision will be announced separately in due course.

RBI declared that in the interest of customer protection and to have greater degree of transparency in regard to actual interest rates charged to borrowers, banks should continue to provide information on maximum and minimum interest rates charged alongside the benchmark PLR.

Meanwhile, RBI was heartened that PLRs of public sector banks declined from a range of 10.0-12.5 per cent in March 2002 to 9-12.25 per cent by March 2003. The public sector banks reduced their PLRs in the range of 25-125 basis points, private sector banks by 50-225 basis points and foreign banks by 15-325 basis points. The number of public sector banks whose PLR was 11.5 per cent or below, has gone up from 10 to 22 between March 2002 and March 2003.

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