Banks find sub-PLR lending a liability

BANKERS POUR OUT HEART TO RBI AT PRE-CREDIT POLICY MEET, DEMAND AIMED AT TRANSPARENCY IN INTEREST RATES

FACED with a growing corporate demand that banks should fix their prime lending rates (PLRs) at single digits, lenders have asked the Reserve Bank of India (RBI) to scrap the current practice of sub-PLR lending. Bankers argue that since 75% of the loans are disbursed at sub-PLR, doing away with such loans would automatically lower the PLR, which would then serve as a floor rate.
    The demand is aimed at bringing in greater transparency in the interest rate structure and also at proving a point to corporates and the government that a lot of borrowers are actually raising money at below PLR.
    Bankers indicated this to RBI during the customary pre-credit policy meeting between RBI governor S Subbarao and CEOs of large banks on Wednesday.
    The sub-PLR loan issue came up in context of last week's meeting of banks with Cabinet Secretary KM Chandrasekhar, during which industry representative Federation of Indian Chambers of Commerce and Industry (Ficci) urged lenders to bring down lending rates to single digits. Most PSU banks have pegged PLR in the range of 12-12.5%.
    However, banks maintained that given their cost structure of raising deposits, maintaining cash reserve ratio (CRR) and statutory liquidity ratio (SLR), they would not be in a position to lower lending rates.
    The resistance to lower lending rates immediately is also because most PSU banks, except for State Bank of India (SBI), have lowered lending rates with effect from April 1.
    In 2001, RBI gave banks the freedom to charge customers interest rates below their benchmark PLRs. "While it is not mandatory for banks to give sub-PLR loans, competition is driving them to offer such advances. If there is a regulatory ban, it will be easier for banks to transit to a more transparent lending system and a singledigit benchmark rate," pointed out a banker at the pre-credit policy meet.
    Some bankers asked RBI to relax the valuation method used to arrive at provisioning norms. Banks have to make provisions for loans based on the hit they have taken after loan restructuring. They pointed out that in certain cases, provisioning on restructured assets was higher than that required had the loan turned bad.
    Another issue that came up for discussion was the insistence by auditors from Institute of Chartered Accountants of India (ICAI) that banks make provisions for loans the moment they received an application for loan restructuring from a customer and not after the restructuring exercise. Bankers felt that RBI had accepted the auditors' stand on the issue.
    As a one-time dispensation, RBI issued a circular last year that an account which was a standard loan as on September 1, 2008, could continue to be treated as a standard asset post-restructuring if a bank received an application from a customer for rescheduling the loan before March 31, 2008.
    The implication of the circular is that if a client is regular in his payments to a bank as on September 1, 2008, but could be on the verge of defaulting in subsequent months, his account could be restructured and continue to be classified as a standard asset.
PLR OF STRENGTH
Bankers argue that since 75% of the loans are disbursed at sub-PLR, doing away with such loans would automatically lower the PLR
Given the costs of raising deposits and maintaining CRR and SLR rates, banks are not willing to lower lending rates
The resistance to lower lending rates is also because most PSBs have lowered lending rates with effect from April 1