The Reserve Bank of India has set up a working group to review the current system of loan pricing — popularly known as benchmark prime lending rate (BPLR) — by banks to improve transmission of monetary signals on to interest rates in the economy.

“The system of benchmark prime lending rate has evolved in such a manner that it has lost its relevance as a meaningful reference rate as bulk of loans are advanced below BPLR,” the RBI said. “Furthermore, this impedes the smooth transmission of monetary signals and makes the loan pricing system non-transparent,” it added.

The RBI introduced the system of BPLR in November 2003 for pricing of loans by commercial banks with the objective of enhancing transparency in the pricing of their loan products. However, the BPLR — supposed to be the best rate for prime borrowers — remained only on paper, as in the last few years they have begun lending to customers at way below the prime rates.

The central bank’s working group, headed by its executive director Deepak Mohanty, will review issues like the concept of BPLR, extent of lending below banks’ prime rates and appropriate loan pricing system based on global best practices. It will also examine the wide divergence in prime rates across banks and suggest a suitable benchmark for floating rates for retail lending, the statement said.

Banking sources admit that the current BPLR system sends a wrong signal to customers and, many a time, customers were in the dark about the real interest rates.

... contd.