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Poornima Mohandas

There is concern in the RBI as well as in Parliament about the divergent interest rates prevailing in the banking system.

Mumbai , Oct. 23

BANKERS are eagerly awaiting the regulator's pronouncements on the prime lending rate issue in the coming Credit Policy.

Early this month, the Indian Banks' Association (IBA) submitted a representation on the same to the Reserve Bank of India (RBI) suggesting that there be two separate PLRs - one for working capital loans and another for term loans.

It has also been suggested that retail finance products be delinked from the concept of PLR.

On implementation of this concept, the `AAA' corporate, which currently accesses funds at sub-PLR rates around six per cent, will get funds at PLR.

This would mean that banks would have to revise their PLRs to the best corporate's rates from the current levels of 9-13 per cent.

The lower rung of corporates would get rates linked to the PLR, based on their credit rating scores in the risk matrix of banks.

"We cannot have a single rate across diverse businesses. The idea of a separate rate for working capital loans and one for term loans is a workable one,'' said Mr S. Mukherji, Executive Director, ICICI Bank.

Explaining the rationale behind a separate rate for working capital loans and for term loans, he added: "The tenor and risks associated with a term loan are much higher than that attached to a working capital loan; therefore the price for the former will be higher. In a term loan there is the added risk of implementation and of construction whereas in a working capital loan, one is lending to a running company and there is information available on the entity.''

There is concern in the RBI as well as in Parliament about the divergent interest rates prevailing in the banking system. Even in a falling interest rate regime, while top corporates are accessing funds at abysmally low rates often comparable to the GOI issued security's yields, the SSI segment of the economy and in some cases even the retail customer is not benefiting from the soft interest rate bias. In the retail segment, the interest rates charged on credit cards and two-wheeler loans have been for long a matter of debate.

The IBA's representation on PLR has been made taking into consideration the divergent views on the subject in the banking industry, many sections of which have no regard for the PLR concept all together.

There are views, particularly in the private sector banking community, that there should be no restrictions whatsoever on the matter of interest rates; they are of the view that the competition will determine rates, thereby offering the best rates to the customer.

The RBI dismantled the concept of tenor-linked prime lending rate (PLR) in the April 2003 Credit Policy and had suggested that banks should take into account actual cost of funds, operating expenses, a minimum margin to cover regulatory requirement of provisioning/capital charge and profit margin while arriving at the benchmark PLR.

The apex bank has held meetings with bankers on the issue subsequently; bankers expect a final verdict on November 3, 2003.

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