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New Delhi , Dec 9

THE average lending rates are likely to come down once banks adopt the new benchmark prime lending rate (PLR) which comes into effect from January 1, 2004, the Reserve Bank of India's Deputy Governor, Ms K.J. Udeshi, has said.

The central bank floated the notion of benchmark PLR in its Credit Policy and asked the Indian Banks' Association (IBA) to formulate it. IBA has fixed January 1 as the deadline for banks to adopt the new way of fixing PLR.

Speaking to newspersons at the sidelines of a banking conference organised by the International Chamber of Commerce, Ms Udeshi said, "Benchmarking is definitely necessary because we don't want banks to give sub-PLR rates to borrowers in some sectors and neglect other sectors." She said that currently about 50-60 per cent of sectors were not getting finance at sub PLR, something that the RBI did not want.

When asked specifically whether the average lending rates of banks would come down once the new system is in place, the Deputy Governor said, "Yes, it will come down." The new benchmark PLR would be pegged by each bank on the basis of various parameters such as cost of funds, operational cost, NPAs and profit margin. "This will also ensure that there is transparency and borrowers would be able to know the basis on which the interest rate is charged to them."

The new benchmark PLR would, however, not be applicable to loans taken by individuals, including housing and retail loans. "They (IBA) have excluded certain category of loans. Any lending to individuals will be excluded from the benchmark PLR," she said.

It would be left to the bankers to decide the rates of retail loans, Ms Udeshi added. Banks would be forced to peg market-related rates for retail loans as it would be difficult for them to compete and survive otherwise, she said.

The banking industry agreed that overall lending rates would come down. According to Mr S.S. Kohli, Chairman, Punjab National Bank, "I feel interest rates would be stable. It might go down by 0.25 per cent in certain sectors." He also added that most of the corporates had already been availing themselves of loans at below PLR and also been tapping the debt funds.

Mr K. Cherian Varghese, Chairman, Corporation Bank, said "lending rates should stabilise with a possible tilt downwards by about 0.25 per cent. There will be no drastic reduction in rates." On retail segment, he said, "We don't expect rate cuts in the consumer loan segment."

Our Mumbai Bureau reports: Mr V. Leeladhar, Chairman, IBA, and Chairman-cum-Managing Director, Union Bank of India, said, "In the next three weeks, we expect most banks to go to their respective boards for the adoption of the benchmark PLR as per the IBA's guidelines. Although we have not set any deadline, we expect that banks will be ready with their benchmark rates by early January, and the adoption of these new rates may lead to a further reduction of around 25 to 50 basis points in lending rates."

The benchmark PLR is to be seen as a reference rate around which most of the banks' lending would take place. The pricing for borrowers can be arrived at by adding time-varying term premia and risk premia depending on risk profile and such other elements of costs as may be considered necessary. Banks may also charge floating rate products by using market benchmarks in a transparent manner.

Meanwhile, some realignment in the lending rates has already begun with Bank of India having dropped its PLR by 0.5 percentage points to 11 per cent effective December 1. Other banks have started trimming their deposit rates, which is viewed as a prelude to a reduction in lending rates by industry watchers.

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