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P. Devarajan

OVER the last many days, bankers and RBI have been holding talks on modifying the concept of prime lending rate (PLR), to make it more responsive to sectoral demands.

A few bankers (in a minority, of course) would like the PLR to be scrapped, with the price of money related to the financial status of the borrowers irrespective of sectors. The majority, seemingly, would like to work out sectoral rates from the PLR, and not give up on PLR.

The RBI has not made up its mind and some expect changes on April 29. Currently, the PLR rules in the 10.50-11 per cent range, with top industry corporates getting money at sub-PLR rates. More than the industry, it is the Centre that is getting funds at sub-PLR rates for the upkeep of bloated politicians and bureaucrats. No bank has ever thought of credit rating New Delhi.

An option could be to derive interest rates from individual PLRs for housing, infrastructure, industry, agriculture and SSI sectors. "In all instances, the interest rates for all sectors will be linked on a floating basis with the PLR. Within each sector, the best borrower may get funds at competitive rates,'' explained a banker.

That makes sense provided the PLR is arrived at on a rational basis, which is not happening. An arbitrary spread of 3 to 4 per cent is embedded in calculating the PLR and there are no linkages between banks' PLR and the Bank Rate of RBI.

For long, RBI has been trying to make the Bank Rate a forceful indicator and banks have been defeating the very idea. Savings bank deposit rates have been cut to 3.50 per cent, interest rates on contractual savings have been pruned by 100 basis points and yet bankers refuse to drop PLR by even 50 basis points.

One banker admitted: "Over the last three years we have learnt the game. If the interest rates go up, we raise the mark-up over PLR to protect profits. When interest rates go down, we make money by taking positions in the money and G-Secs markets. Either way we make profits.''

That banks are not keen on lowering the cost of money is apparent in their flouting the budgetary diktat of Mr Jaswant Singh on farm loans. The Finance Minister announced a two per cent band over and below the PLR for farm and SSI loans and added: "Agriculture and SSI will hereafter have to pay no more than an extra two percentage points than the best bank customers.'' Most banks are still taking the proposal to their boards.

If Mr Singh can get the economy to accept VAT, he could as well order banks to stick to the Budget proposal. Some bankers are not sure whether lending rates can be brought down, with inflation touching 6 per cent forgetting that interest rates were on the high side when inflation was at 2 per cent.

The RBI is not overly worried over inflation numbers as a fall in international crude prices could reduce worries. Others disagree. Also, the RBI may be keen on a low interest regime to hold steady the slight uptrend in growth, apart from helping the Centre pick up funds for free.

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