The Hindu Business Line : Is multiple floor rates the remedy?

The RBI seemingly prefers banks (individually) to announce a single Prime Lending Rate (PLR), with lending rates for various sectors derived from it; the cluster of lending rates around the PLR could stay put within a 4 percentage points band.

Bankers are not quite comfortable, as sub-PLR lending has dated the concept of PLR.

Bankers have been looking at the idea of multi-sector floor rates with the best borrower getting funds at the floor; corporates, agriculture, small scale sector, retail will bear individual floor rates which are not to be pierced.

Loans, based on credit rating, could bear a price above the floor rate, but nothing below the floor.

At best, there could be a difference of 50 percentage points across the floor rates of banks. For a bank to prescribe a clutch of floor lending rates could be a trifle dicey as the cost of deposits across sectors is identical.

The Asset-Liability Management Committees of banks will have a hard job to do. Will the floor rates for corporates be lower or higher than for agriculture or the small-scale sector, and if so why?

The strategy of multiple floor rates may prevent banks from cutting each other as at present.

"It may be best for banks to assign the price of money based on the credit quality of the borrower, be it a corporate or a farmer. Currently, the farming sector gets loans up to Rs 2 lakh at 8.5 per cent which is higher than the 6 to 6.5 per cent charged for corporates," said the Chairman of a nationalised bank and added, "We are under pressure from corporates as they can raise overseas funds to augment that from the equity markets and their treasuries. These options do not exist for others making them, in a manner, captive borrowers. We are trying to arrive at some formula which is acceptable to the RBI."

The benchmark PLR of public sector banks moved from a range of 10.25-11.50 per cent in March 2004 to 10.25-11.25 per cent in March 2005.

BPLRs of foreign and private sector banks moved from a range of 11-14.85 per cent and 10.50-13 per cent, respectively, to 10-14.50 per cent and 11-13.50 per cent, respectively, during the same period, says the Report on Trend and Progress of Banking in India, 2004-05.

Privately, bankers are upset over loan snatching. Some prefer to join hands on pegging the price of money while realising its futility.

Competition cannot be set up nor is it fair.

Banks are doing fine if the RBI Report on Trend and Progress of Banking in India, 2004-05 is to be believed.

"The net interest margin (NIM) of a bank reflects the efficiency of its intermediation process, a lower margin being indicative of higher efficiency. Most countries in developed and even several emerging economies have NIM of around 2 per cent of total assets," says the RBI Report.

The NIM for public sector banks in 2004-05 stood at 3 per cent while that for old private banks was 2.7 per cent and that for new private banks was 2.2 per cent.

The BPLR is an offshoot of an RBI move in November 2003 and the Indian Banks' Association (IBA) advised its member banks to announce a benchmark prime lending rate (BPLR).

"Over the period, however, the system of BPLR has evolved in a manner that has not fully met these expectations. Competition has forced the pricing of a significant proportion of loans far out of alignment with BPLRs and in a non-transparent manner.

As a consequence, this has undermined the role of the BPLR as a reference rate.

"Furthermore, there is a public perception that there is under-pricing of credit for corporates while there could be overpricing of lending to agriculture and small and medium enterprises," the RBI said on October 2005.

The share of sub-PLR lending in total lending of commercial banks (excluding export credit), has moved up from about 50 per cent in March 2004 to over 60 per cent in March 2005 without hurting bank balance sheets.

Should not the entire loan portfolio be built at sub-PLR rates with volumes fetching higher incomes?

Should not the borrower get a glimpse of the way the banking system addresses the spectrum of lending rates?

Is the adroit exercise meant to hold up the cost of money?

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

More Stories on : Interest Rates | On Mint Street

Stories in this Section
SBBJ to hike farm lending taking corporates along

Jammu Rural Bank to vend MetLife products

Rupee declines; bond prices rise

`Govt, RBI tracking rupee'

Bajaj Allianz Life gets Rs 60 crore capital infusion

Banks told to be liberal with loans to flood-hit in TN

ICICI Bank's public issue subscribed 1.86 times

SBT launches special savings bank account

Capital restructuring must for growth: Indian Bank chief

Is multiple floor rates the remedy?