Latest initiatives on BPLR

Preamble:

RBI introduced the system of BPLR in November 2003 for pricing of loans by
commercial banks with the objective of enhancing transparency in the pricing of their
loan products.

However, the BPLR – supposed to be the best rate for the prime borrowers – remained
only on paper, as in the last few years Banks have begun lending to their borrowal
customers at way below the prime rates.

The above issue of review of BPLR has been the unresolved/unreconciled for quite
some time. Since Government holds the majority stake in the Public Sector Banks
(PSBs) and also represent themselves in the banks by sending their nominees, Finance
Ministry maintained that in the 2006 that these Banks had to get any revision in BPLR
approved in the Board only. This BPLR issue was discussed in the Managing Committee
of IBA as per the advice of the Government at that time. The Government further
advised IBA to:
• Chalk out the future course of action in determining the BPLR.
• Resolve the issues in determining the BPLR and come out with a differential
BPLR system for various sectors or customer groups.

This paper is extension of the above effort.

RBI’s disposition on BPLR:

• RBI is convinced that the system of BPLR did not fully meet the expectations of
pricing of credit according to the risk assessment.
• Competition forced the banks to price a significant proportion of loans far out
of alignment with BPLRs and also not in a transparent manner.
• As a consequence, the above issues undermine the role of BPLR as a reference
rate.
• Recent Concern of RBI:
o RBI maintains that it had cut its policy rates – repo by 425 bps and the
reverse repo by 275 bps in a phased manner starting from September
2008.
o But banks have cut their BPLR rates by only 150 – 200 bps.
o In view of this, BPLR has lost it relevance and again requested IBA to
review the BPLR system so that:
 Loan pricing becomes more transparent.
 The monetary policy transmission becomes more effective.

Bankers’ Dilemma:

• Banks maintain that the deposits are mostly accepted on fixed interest basis.
This is a contracted rate of interest and would continue till the deposits are
matured.
 • When the policy rates are coming down, the Banks can accept the deposits at
reduced rate of interest only for the deposits accepted / renewed fresh.
• In view of the above, their cost of funds would not come down immediately
once the policy rates are reduced.
• The Cost of funds can down only with a lag effect.
• Further in the recent downturn, the Banks are expecting their NPA to go up
considerably. Under this backdrop, the risk premium, one of the factors to be
added on the BPLR would go up.
• Summing up, Banks cannot reduce / pass on the benefits of the reduced rate of
interest to the borrowers unless their cost of funds comes down structurally.

• Sub-BPLR portfolio:
o The compulsion of competition makes the banks to lend below-BPLR.
o Out of the fresh loan flows, approximately, 65 to 70% are lent as Sub-
BPLR as of March 2009. This figures was at the level of 76% for the year
2007-08.
o The comfortable liquidity in the system and low demand for funds,
force the banks to lend at below-BPLR.
o Infact, Banks’ most of the short-term loans to the corporates are given
at 7.50% to 8% (below BPLR).

RBI’s latest initiative:

• RBI has set up a Working Group to review the current BPLR system of loan
pricing by banks to improve transmission of monetary signals on the interest
rates of the economy.
• The RBI’s working group, headed by its Executive Director Shri Deepak
Mohanty, will review issues like the concept of BPLR, extent of lending below
BPLR and appropriate loan pricing system based on global best practices.
• The Group will also examine:
o The wide divergence in BPLR across banks and suggest a suitable
benchmark for floating rates for retail lending.
o Review the administered lending rates for small loans upto Rs.2 lakhs
and for exporters.

IBA’s Initiative and Efforts:

IBA has also set up a Working Group on the review of the BPLR and some of the broad
thinkings are given below:

• Segmental PLRs:
o There is a need for segmenting the PLR into two to represent the broad
segments such as Corporate sector and Retail sector or can be
segmented into three also such as Corporate – Working Capital,
Corporate – Term Loans and Retail Sector. However, at a minimum, all
banks have to declare two PLRs to interbank comparison. Though banks
have to revisit the BPLR every quarter, it is upto the management to
take a call on increasing or decreasing the PLR according to the
situation prevailing at that in time.
• Categories, which need to be kept outside PLRs:

o All priority sector and directed loans need to be kept outside the
purview of BPLR.
o Similarly, all fixed rate loans, which is contracted to remain fixed
through out the tenure of the loan, could be kept outside the purview of
the BPLR.
o Concept of sub-PLR lending cannot be completely ruled out. Some
preferred corporate customer would quite likely to get loans below BPLR.
o Loans upto Rs. 2 lakh need to delinked from BPLR
o Loans, which are getting refinance from the agencies such as NABARD,
SIDBI, NHB cannot be linked with BPLR and would be guided by the rate
charged by these agencies.
o Loans for purchase of consumer durables – Being fixed in nature could
be outside PLR
o Discounting of Bills and Loans to co-operative banks or any other
banking institution, which are fixed in nature, could be kept outside PLR.
o Loans to its own employees could be kept outside PLR