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Sunday, Dec 15, 2002

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SBI examining sector-wise lending rates

Rukmani Vishwanath

MUMBAI, Dec. 14

THE Reserve Bank of India has asked the country's largest public sector bank, State Bank of India (SBI) to study the issue of `sector-wise segmentation of prime lending rates' (PLR) and come back with its suggestions on the subject.

Recently, ICICI Bank Ltd, had approached RBI for permission to introduce a sector-wise prime lending rate structure, which would enable it to offer differential rates of interest to different sectors of the economy.

Currently, banks' segment PLR on the basis of tenor. A sector-wise segmentation would be on the basis of industries such as infrastructure, agriculture, manufacturing, etc.

Mr A.K. Purwar, Chairman, SBI told Business Line, that the bank is currently `examining the issue'. However, Mr Purwar said it has not yet taken a decision. He declined to elaborate the subject further.

Most bankers appear divided on the issue of charging varying rates on a sectoral basis. While some agree that drastic measures are needed to fund certain credit-starved areas of the economy, others contend that the process of differentiating rates would be chaotic.

One of the critical issues is resource allocation. "A sector- wise segmentation of lending rates would have to be risk-based. It would require an in-depth study into various sectors and the potential benefits and risks therein,'' said a senior official with a private sector bank.

"A bank's business is a mixture of trading and commercial activity. How will you charge on that basis?,'' he said.

Another issue that bankers are concerned about is they will have to justify their `charging criteria' to the general public.

"In a system like this a lot of transparency will be called for. If you are charging a higher rate for a particular sector, you will have to explain why,'' said a banker.

According to talks in banking circles, a few other banks have expressed an interest in going for such a similar interest rate structure. However, banks have been told to wait till the RBI takes a view on the issue after examining the study conducted by State Bank of India.

According to a senior banker, ''If SBI decides to implement the sector wise lending rates structure, other banks may follow suit''.

While bankers agree that PLR currently has lost its significance with sub-PLR, it is common knowledge that small and medium corporates have remained bereft of its advantages. A sectoral segmentation is expected to address these issues, according to senior bankers.

However, a section of bankers believe that the Indian banking system may not be ready for such an interest rate structure. "To go in for something like this would mean that we would have to alter all our existing systems of calculations and this may lead to serious mistakes despite the recent technological advancements in banks. Before we embark on such issues we must make sure that the system can brace itself for any shocks,'' said a banker.

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