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Daily News RBI Credit Policies (1999-2005)
Part II. Review of Annual Statement on Developmental and Regulatory Policies for the Year 2005-06
Interest Rates
Interest Rate Policy
59. The annual policy Statement of April 2005 recognised that there is merit in further deregulation of interest rates in those segments which have remained regulated for reasons relevant at different stages. It proposed, however, to continue with the status quo as various issues pertaining to regulations on interest rates were being debated. In this context, the Reserve Bank constituted an Internal Working Group on NRI Deposits which submitted its report in September 2005. Furthermore, the Indian Banks’ Association (IBA) has been requested to constitute technical groups for preparation of discussion papers on review and deregulation of interest rate on savings bank deposits and lending rates on small loans up to Rs.2 lakh.
BPLR System: Review
60. Pursuant to the announcement made in the mid-term Review of November 2003, the IBA advised its member banks to announce a benchmark prime lending rate (BPLR), with the approval of their boards, keeping in view the operational requirements. Furthermore, banks were allowed to freely price their loan products below or above their BPLR and offer floating rate products by using market benchmarks in a transparent manner. Banks were also encouraged to align the pricing of credit to their credit risk assessment so that both credit delivery and quality improves.
61. Over the period, however, the system of BPLR has evolved in a manner that has not fully met these expectations. Competition has forced the pricing of a significant proportion of loans far out of alignment with BPLRs and in a non-transparent manner. As a consequence, this has undermined the role of the BPLR as a reference rate. Furthermore, there is a public perception that there is underpricing of credit for corporates while there could be overpricing of lending to agriculture and small and medium enterprises. Several requests have also been received by the Reserve Bank from banks suggesting a review of the BPLR system. Therefore, a need has arisen to review the current procedures and processes of pricing of credit through a well structured and segment-wise analysis of costs at various stages of intermediation in the whole credit cycle. Accordingly, the IBA may, in consultation with its member banks, review the BPLR system afresh and issue transparent guidelines for appropriate pricing of credit.
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