In a paradigm shift for Indian banks, RBI may permit each of them to decide their own lending rates without reference to the benchmark prime lending rate (BPLR), the common reference rate for all banks. An announcement could come in the central bank’s half-yearly review of credit & monetary policy scheduled for October 27.

The plan to free banks from the BPLR has been drawn up by an RBI committee for which Indian Banks’ Association is facilitator. RBI had asked IBA to be involved with the panel, headed by executive director Deepak Mohanty, to ensure banks’ concerns were reflected in the recommendations.

A source familiar with the development told FE on condition of anonymity that the committee’s report would be submitted this week. The deadline for the report was extended from September 30 to October 16. A senior IBA official said the committee has recommended a base rate to replace the BPLR. This means each bank will have a specific rate—to be reviewed every quarter—linked to the one-year deposit rate.

To the base rate, the bank will add operational costs to arrive at the actual rate at which it will lend. The BPLR had been losing relevance over the years as banks often undercut or exceeded it on a case-by-case basis. An RBI report had observed that almost two thirds of the total credit from the banking system is not indexed to the BPLR. If the recommendation is accepted, banks will not be able to lend below the base rate.

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