The Telegraph
Since 1st March, 1999
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RBI top gun sees lending rate fall

New Delhi, Dec. 9: Industrial and farm lending rates across the country are likely to head southwards after banks adopt a new benchmark prime-lending rate (PLR) from January 1.

Reserve Bank deputy governor K. J. Udeshi today told newspersons she expected average lending rates in the country would come down with adoption of the new PLR regime for corporate and farm loans.

Bankers, present at a convention being held here where Udeshi was the chief guest, said interest rates could come down by about a quarter of a percentage point, not so much on account of the new benchmark but rather because of excess liquidity in the system.

The new benchmark for corporate and priority sector loans has been necessitated as the current PLR has been totally devalued by banks benchmarking their lending to other norms such as Mumbai inter-bank offer rate (Mibor).

This has led to a situation where banks are lending to select customers at sub-PLR rates, while offering far higher rates to priority sector borrowers such as small businesses and farmers.

Also loans given earlier, which were benchmarked to the PLR, have remained static despite cuts in interest rates all round as these were benchmarked against the PLR.

“Benchmarking is definitely necessary because we don’t want banks to give sub-PLR rates to borrowers in some sectors and neglect other sectors,” Udeshi said on the sidelines of the conference.

“As much as 50-60 per cent of sectors are not getting finance at sub-PLR. That is definitely not what RBI wants,” she said.

However, the new benchmark would not be applicable to individual loans, housing and retail loans, which would be pegged at the discretion of the banks and could be at below PLR levels.

The new benchmark PLR would be pegged by each bank on the basis of various parameters like cost of funds, operational cost, non-performing assets and profit margins. “This would ensure transparency in the system,” she said.

Udeshi also said the RBI would come out with new norms for banks in a bid to check money laundering and terror financing, which would weed out suspicious transactions by informing the central banker of any that they come upon. Banks will be expected to follow the ‘know your customer’ principle, and follow a blacklist of countries and groups believed involved in terror funding.

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