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Why does RBI want to change PLR system to Base
rate of Interest
(As submitted by one of our
readers - Mr. Danendra Jain)
It was never a point of significance for any customer
who borrowed money from bank whether it was Prime lending rate (PLR) or
benchmark PLR (BPLR) because banks use to apply different standard of rating
to decide applicable rate of lending for a particular borrower and also for
different segments of lending. Rates used to be much below and much above
PLR r BPLR which is normally called as sub PLR lending. In many cases like
export finance, agricultural finance, priority sector lending ,retail
finance for purchase of home or vehicle, banks use to charge even fixed rate
or a rate which was considerable below PLR and banks will continue to do so
even when banks adopt Base Rate in place of existing system of PLR or BPLR.
Even now in case of floating rate, interest comes down or goes up as per
market dynamics. After all what is the fun behind change in terminology from
PLR to Base rate
In brief, lending rates use to vary from 4% to 18% and PLR or BPLR use to
vary from 11% to 16% from bank to bank. And banks are quite justified in
applying different standards of rate of interest as per their convenience
and in accordance with their policy framework of earning profit because of
freedom given to banks by government of India in line with the policy of
liberalization and globalization under the umbrella of reformation policy
adopted after 19991.
On the one hand government talk of freedom and competitiveness for banks and
on the other they dictate or poke their nose unnecessarily in interest rate
structure or lending standards .Such frequent change in policy on interest
rates creates confusion not only among bankers but also among loan seekers
and results in unnecessary take over of loan from bank to other bank. It
also gives rise to dissatisfaction among even good customers when they find
that some other bank is lending at lower rate. Many advance accounts have
gone bad, assets have become non performing assets (NPA) only because of
frequent change of rate of interest.
In fact government should decide all types of interest rates on chargeable
uniformly by all banks on deposits and advances and only non-interest income
as also service quality should be the area where bank will compete each
other in raising profit of the bank. Unhealthy interest rate war among banks
specially among PSU banks is not at all good because it after all adversely
affects the profitability of weak banks .Weak banks are also part of same
government and they have also issued shares to general public and hence they
cannot be allowed to grow weaker and ultimately collapse .It is well know
different PSU banks have different capital structure, different manpower,
different infrastructure and different culture of working .which they have
inherited from their past, pre- reformation era. Even after twenty years of
reformation and forty year of nationalization of banks, there is over man
power in some banks and there is acute crisis of man power in some other
banks.
As a matter of policy framework, government should decide that maximum gap
between peak deposit rates and peak lending rate for banks private or
public. Government can at best suggest banks to take care of social agenda
of the government and those banks that do not fulfill the sectoral targets
fixed by government should be severely penalized.
I therefore feel that ruling of RBI asking banks to have Base rate in place
of PLR is of no value and definitely a futile exercise. Base is always Zero
and will continue to be zero. Old wine in new bottle is an old proverb.
Government changes the bottle but banks serve the same wine as they have
been serving for last forty years. As long as government is incapable to
recover the money from willful defaulters, the health of banks cannot
improve and there may not be healthy credit delivery for real GDP growth as
also for creation of demand in the market. Government has to discard vote
bank policy and try to understand the benefits of Indian customers in Indian
perspective, Indian banks in Indian context and not always try to compare
India with foreign banks because they are not all comparable in any respect
and from any angle of consideration. Waiver of loan or culture of compromise
with willful defaulters or political interference in banking day to day
affairs is not as much in foreign banks as it is largely prevalent in Indian
Banks. Proportion of poor people in India and their standard of living
is not at all comparable with that of developed countries with which our
banks are compared. And so on
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