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C. Shivkumar

Bangalore , Dec. 1

PUBLIC sector banks have finalised the formula for arriving at the new benchmark prime lending rate (PLR) as prescribed by the Reserve Bank of India. Syndicate Bank is among PSU banks expected to shortly announce the new rates on this basis.

The Syndicate Bank Chairman and Managing Director, Mr Michael Bastin, confirmed that the new formula had been finalised. He said, "This formula will now act as the basis for fixing all future PLRs." PLR is the best lending rate banks offer to their prime customers.

The new formula is expected to be adopted by the private sector banks also.

The formula has fixed weightages for capital, deposit funds, costs for maintaining cash reserve ratio balances, and profit mark-up. The details have not been disclosed. The pricing for loans from banks would be determined after factoring in a risk premium. The new formula was unlikely to bring about substantial changes in the current level of PLR, sources said here.

One major reason stems from the large dividend demand placed on the banks for the current year by the Government which is currently the largest equity holder in the PSBs. This demand has, in turn, put pressure on the weighted average cost of working funds, sources said.

The dividends are to be factored in after netting for taxes, indicating that even the cost of taxes would be passed on to potential borrowers.

Bankers had been appealing to the Government to permit some of them to bring down their equity capital in view of the high capital to risk weighted asset ratio, which is effectively about upwards of 12 per cent for most of them.

" If this is done, it would perhaps help bring down the PLR."

Another element in the benchmark pricing is the cost of deposits. Most of the public sector banks have a deposit pricing which starts from 3.5 per cent for demand deposits and goes up to 8 per cent for the maximum term deposits.

Banks, in the past, have been including the cost of non-performing assets (NPA) into loan pricing and keeping the spreads high.

However, the sources said, that if the recoveries and NPA reductions continued at the current pace, and additional dividend demands from the Government were restricted, banks would be in a position to operate at much thinner spreads.

Banks are currently operating at spreads in excess of 3 per cent.

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