RBI to address credit delivery costs

Removing the anomalies in the pricing of credit will be a key area of focus for the central bank in its busy season credit policy.

The Reserve Bank of India is also likely to emphasise a single benchmark prime lending rate for banks.

Even though banks are averse to the idea of a single PLR, the regulator intends to push for this in order to remove the price inefficiency in the credit market, where only a handful of borrowers have gained from the falling interest rates.

Triple A borrowers today get loans at sub-PLR rates, whereas other borrowers pay higher. Despite interest rates falling, many continue to borrow funds at 14-15 per cent, while a handful pay as little as 9 per cent interest.

A single benchmark PLR will, therefore, help the majority of borrowers because pricing will be transparent.

Bankers, however, are opposing this tooth and nail. "The cost of credit varies from loan to loan. The cost of mortgages works out cheaper than that of consumer loans. Without addressing the cost aspect, a single benchmark PLR will lead to cross-subsidisation," said a senior public sector banker.

Once the cost of credit delivery -- including the transaction cost, terms and conditions of credit, risk premium, return on capital -- are outlined, credit based on the PLR cannot vary much from bank to bank.

The banking industry has suggested various methods to arrive at an "opportunity cost-based" PLR, which is easier to standardise, as opposed to the cost-based PLR, which varies from bank to bank.

Additionally, some banks have suggested a PLR across maturities (in terms of loan tenures) by looking at the spread of assets across the period of the credit for a few ideal banks.

The latter methodology is similar to the London inter-bank bid offer rate (Libor), which is a polled rate across a few major banks.

Industry experts feel that while a broad guideline will be outlined by the RBI covering all different loan segments, deciding the spreads over the PLR will be left to the discretion of the respective banks within a broad band suggested by the regulator.

While addressing the credit issue, bankers also expect some flexibility in dealing with fixed rate deposits. That is to say, banks should be allowed to return deposits to the depositor within the period of the tenure in a falling interest rate regime.

This will offer banks a put and call option in dealing with fixed rate deposits and will help depositors gradually move towards floating rate deposits.

"In a falling interest rate regime, both depositors and lenders should be given the opportunity to decide on the cost and benefit," said a private sector bank official.

With flexibility on deposits, banks will be in a better position to lower lending rates and price loans more efficiently, he added.

At the micro level, bankers anticipate the cap on priority sector lending to be increased five-fold to Rs 5 crore (Rs 50 million) against the existing Rs 1 crore (Rs 10 million). Interest rate sops are equally expected in sectors like sugar, textiles and tea.

Agricultural product marketing and processing are likely to receive a boost. Further sops are expected in the credit policy for the aged and for pensioners.