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Poornima Mohandas

Mumbai , Nov. 15

THE Indian Banks' Association has agreed to the RBI suggestion of having a single benchmark prime lending rate.

Earlier the IBA had suggested that there be separate prime rates, one for working capital loans and another for term loans, but the Reserve Bank was not favourable to that suggestion and the idea was shelved.

However, the single prime rate will apply only to floating rate loans in the banking system. Floating rates are determined in relation to the rate and move in accordance with it. The plus or minus component depends on various factors such as credit-worthiness of the borrower among others.

This is part of the draft guidelines on formulating the prime rate for commercial banks prepared by IBA. The apex organisation of banks will submit the draft to its managing committee, its highest policy-making body, on November 20.

The committee, elected by the ordinary members of the association, consisting of the chief executives of 30 banks - inclusive of public sector and private sector banks, foreign banks and co-operative banks - will discuss the draft and on approval IBA will issue a circular on the same.

The benchmark prime rate will be determined taking into consideration the factors as suggested by RBI earlier, that of actual cost of funds, operating expenses and a minimum margin to cover regulatory requirements of provisioning and capital charger, and profit margin.

As per the new guidelines, banks have been granted freedom on what they call `actual costs of funds' since some of them refer to the weighted average cost of funds while others go by the marginal cost of funds. Banks will also have the leeway to alter the rate to the customer depending on the specific individual's operating costs borne by the bank.

The contents of the draft have informally been discussed with the Reserve Bank of India, said a senior IBA official. Following fresh guidelines on the formulation of the PLR there is expected to be considerable re-pricing of loans across the banking system and interest costs to customers are only expected to come down.

Banks will take the set of guidelines to their individual boards and work out a single number, which will have to be announced and publicly displayed on the bank's Web site as well as on notice boards of bank branches. Transparency to the customer on prime rate is of prime importance, said the official. Along with the rate, banks will also have to publicly disclose the maximum and minimum spreads.

The reworking of prime rates is also expected to narrow the band of prime lending rates currently existing across the banking industry between 9 per cent and 14 per cent, in the case of some foreign banks.

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