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Suresh Krishnamurthy

THE dust that has been kicked up over the benchmark prime lending rate (PLR) appeared to suggest that a sharp decline in lending rates was in the offing. The RBI's preference for soft interest rates and its call to financial intermediaries to introspect on the rigidity in lending rates also suggested that lending rates may decline for priority sector advances, small and medium enterprises and lower rated companies.

However, only a marginal softening of the lending rates is on the cards.

What is more, single digit-lending rates, which are now available for home loans and car loans, is still only a pipe dream for the bulk of the borrowing community.

This is because even as public sector banks are charging between 10 and 13.5 per cent for bulk of their business advances, the overall yield on their advances is still only in the range between 8.5 per cent and 9.5 per cent.

This rate is also declining with each quarter. The overall yield on advances is so low because of loans granted to top rated companies and retail loans at rates much below PLR.

For instance, the overall yield on advances of State Bank of India for the quarter ended September 2003 was 8.43 per cent.

However, SBI's lending rate at which 60 per cent of its business was contracted was in the range between 10 and 13.5 per cent. In this context, a large decline in lending rates for lower-rated companies, small and medium enterprises or priority sector advances is unlikely.

According to Mr R.V. Shastri, Chairman and Managing Director, Canara Bank, even the benchmark PLR is likely to be in double digits.

Mr Shastri also said a softening of interest rate of about 25 basis points is what is likely. Canara Bank's PLR is now 11 per cent. Mr Shastri also averred that banks were doing their bit in reducing the interest rates. For instance, interest rate was kept at 9 per cent for all loans of up to Rs 50,000, though they were required to offer that rate only for agricultural advances, he added.

Mr Shastri said the only solution for borrowers was to upgrade their rating to avail themselves of lower rates.

Mr N. Gopalakrishnan, Chief Financial Controller, State Bank of India, also indicated that the scope for decline in lending rates was limited even if the benchmark PLR emerges.

According to Mr Gopalakrishnan, loans of less than Rs 5,00,000 to sectors such as small and medium enterprises are already enjoying concessional rates. He said that larger ticket loans to these enterprises would continue to be at `PLR plus' because of the risk associated with lending to these entities. The only silver lining is that over a longer period, a decline in lending rates is possible. According to Mr Shastri, if inflation continues to be benign and liquidity continues to be ample, interest rates will keep coming down. As long as return on assets stays above 1 per cent, banks will strive to lower lending rates, he added.

However, expectations of significant decline in lending rates because of the emergence of benchmark PLR is misplaced notwithstanding the exhortation of the RBI to banks to reduce rates.

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