The Telegraph
Since 1st March, 1999
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Real lending rates still too high, says RBI

Bangalore, Dec. 29 (PTI): Reserve Bank of India deputy governor Rakesh Mohan today said the effective real lending rates by banks continued to remain high, cautioning that it had adverse systemic implications in a country like India.

Banks had reduced their prime lending rates (PLR) to some extent and were also extending sub-PLR loans, but effective lending rates continued to remain high, Mohan told the Bank Economists’ Conference (Becon) here today.

Citing estimates that the average lending rate of scheduled commercial banks had declined from a peak of about 17 per cent in 1995-96 to about 14 per cent by 2001-2002, he said while nominal interest rates had come down, they had not fallen as much as the inflation rate.

“Consequently, the effective real lending rate continues to remain high,” he said, adding this development had adverse systemic implications in a country like India where interest cost as a proportion of sales of companies were much higher compared with many emerging economies.

He added that especially after the introduction of sub-PLR lending by banks, the spreads between the minimum and maximum lending rates seemed to have widened. The RBI, he said, was making efforts to publish on its website bank-wise information on the minimum and maximum lending rates.

“Our own internal exercises reveal that the concept of PLR may need to be reviewed in the current context. Perhaps the bank economists may like to study the international experience and come out with suggestions,” Mohan told bank chiefs at the concluding session of Becon, the most prestigious event of the banking industry.

Noting that banks had also reduced their deposit rates, he said the fall in the interest rates in recent times had been in consonance with the monetary policy stance of a soft rate regime.

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