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, retail finance banks used to charged even fixed rate or a rate which was considerable below PLR
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. Judiciary in foreign countries is not as weak and corrupt as it is in India. 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…………..
Danendra Jain
20th October 2009
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