Benchmark PLR regime may go

Borrowers may see more transparency in interest rates charged by banks

 Borrowers may now see more transparency in interest rates charged by banks from the start of next fiscal with the Reserve Bank of India  (RBI) proposing to do away with the existing system of giving commercial loans at cheaper than the benchmark rates.

“The base rate system will replace the BPLR system with effect from April 1, 2010...since the base rate will be the minimum rate for all commercial loans, banks are not permitted to resort to any lending below the base rate,” RBI said in its draft guidelines on the base rate.

The RBI has been finding it difficult to successfully transmit the message given in its monetary policies, since banks have been extending loans at sub-BPLR rates to highly rated corporates.

While RBI had considerably reduced its short term lending and borrowing rates, besides increasing money supply so that the impact of financial crisis be blunted, banks have not proportionately cut the lending rates. As such, it suggests to prohibit any banks from extending any commercial loan including personal, auto and home loans below base rate, which will be fixed by banks themselves.

Accordingly, the current requirement that BPLR will be the ceiling rate for loans up to Rs 2 lakh will stand withdrawn, RBI said terming it as “deregulation of lending rates.”