The Hindu Business Line : Will banks price car, tractor loans at par now?

The RBI has asked the IBA to review, in consultation with its member banks, the BPLR system afresh and issue transparent guidelines for appropriate pricing of credit.

AT long last, the Reserve Bank of India and the bankers today had a crack at the weird functioning of sub-PLR lending with banks cutting each other to offer cheap loans to corporates.

The RBI Governor, Dr Yaga Venugopal Reddy, told the press that both parties were uncomfortable with the system. After the Mid-Term Review of November 2003, the Indian Banks' Association (IBA) advised its member banks to come up with a benchmark prime-lending rate (BPLR) with board approvals. Banks were also allowed to freely price their loan products below or above their BPLR and offer floating rate products by using market benchmarks in a transparent manner, says today's RBI Credit Policy.

Banks run to offer corporate loans with a 3-year product priced between 6 per cent and 7 per cent, if not lower, at a time when the best of corporates have delinked themselves from the banking system.

The RBI admits: "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 underpricing of credit for corporates while there could be overpricing of lending to agriculture and small and medium enterprises. Several requests have also been received by the RBI from banks suggesting a review of the BPLR system. Therefore, a need has arisen to review the current procedures and processes of pricing of credit through a well-structured and segment-wise analysis of costs at various stages of intermediation in the whole credit cycle.

Accordingly, the IBA, may, in consultation with its member banks, review the BPLR system afresh and issue transparent guidelines for appropriate pricing of credit."

Will this help avert the gross ignominy in pricing a car loan at 8 per cent and a tractor loan at 12 per cent? It is hard to believe banks would come up with details of loan pricing; they have never done that.

Will they credit rate on par a rich farmer and a 7-star corporate; a small farmer and a middle class factory worker?

Have banks in general started credit rating their non-corproate loan portfolios? At the press meet, the RBI Deputy Governor, Dr Rakesh Mohan, said some banks accounted for 80-85 per cent of their loans below the declared BPLR while another cluster lent 65-70 per cent of their funds under BPLR.

The interest rates varied from 4 per cent (is it the Differential Rate of Interest scheme under which banks lend no monies to the poor?) to 24 per cent.

The question has to be squarely faced: Why is the banking system discriminating against farmers and the small scale sector without any reference to their performance? The ruse of high transaction costs will not work anymore.

There will be demand for funds from rural India as going by the RBI statement, "it is likely that the kharif output may register an increase over the previous year's level. In addition, the improvement in water storage levels over the previous year augurs well for the outlook on rabi production."

If this is so, farm output could temper the bite of inflation.

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