The document discusses the prime lending rate (PLR), which is a reference interest rate used by banks to lend to favored customers. It provides an overview of the history and regulation of PLR in India, including the introduction of the benchmark prime lending rate (BPLR) in 2003. The summary also notes that banks have increasingly lent below the BPLR due to competitive pressures and issues with the transparency and downward stickiness of the BPLR.

1. Presentation on Prime Lending Rate
(PLR)
Presented to Presented by
Dr Ranjit Singh Sujoy Kumar Paul
Asst.Professor (03)
DBA-JNSMS Biplab dey (34)
Sanjeeb Paul (18)
Janmajit Debnath
(13)
Dhruba Debnath
(43)

2.  Prime rate or prime lending rate is a term
applied in many countries to a reference
interest rate used by banks. The term
originally indicated the rate of interest at
which banks lent to favoured customers, i.e.,
those with high credibility, though this is no
longer always the case. Some variable
interest rates may be expressed as a
percentage above or below prime rate.

3.  The BPLR was seen as a reference rate and
was to be computed taking into
consideration (i) cost of funds; (ii)
operational expenses; and (ii) a minimum
margin to cover regulatory requirements of
provisioning and capital charge, and profit
margin.
 Banks are free to fix benchmark PRIME
LENLIND RATE BPLR for credit limits through
the banking regulation act, and the reserve
bank of India act

4.  The prime rate is used often as an index in
calculating rate changes to adjustable rate
mortgages (ARM) and other variable rate
short term loans. Many credit cards and
home equity lines of credit with variable
interest rates have their rate specified as the
prime rate (index) plus a fixed value
commonly called the spread or margin.

5.  October 1994 Lending rates for loans with
credit limits of over Rs. 2 lakh deregulated.
Banks were required to declare their Prime
lending rates (PLRs).
 October 1997 For term loans of 3 years and
above, separate Prime Term Lending Rates
(PTLRs) were required to be announced by
banks.

6.  April 1998 PLR converted as a ceiling rate on
loans up to Rs.2 lakh.
 April 1999 Tenor-linked Prime Lending Rates
(TPLRs) introduced.
 October 1999 Banks were given flexibility to
charge interest rates without reference to
the PLR in respect of certain categories of
loans/credit.

7.  April 2000 Banks allowed to charge
fixed/floating rate on their lending for credit
limit of over Rs.2 lakh.
 April 2001 The PLR ceased to be the floor
rate for loans above Rs. 2 lakh.
Commercial banks allowed to lend at sub-PLR
rate for loans above Rs.2 lakh.

8.  April 2002 A system of collection of
additional information from banks on the (a)
maximum and minimum interest rates on
advances charged by the banks; and (b)
range of interest rates with large value of
business and disseminating through the
Reserve Bank‟s website was introduced.
 April 2003 The Reserve Bank advised banks to
announce a benchmark PLR (BPLR) with the
approval of their boards. The system of
tenor-linked PLR discontinued.

14.  Over the years, because of competitive
pressures banks have increasingly resorted to
financing of various categories of borrowers
at sub-BPLR rates such as corporates, housing
and retail sector.
 The major share of sub-BPLR lending was of
longer term loans (above 3 years), whereas
in respect of private sector banks and foreign
banks, the major share of sub-BPLR loans
was in the form of consumer credit.

15.  Given the large proportion of sub-BPLR
lending by the banking system, concerns
have been raised on the transparency aspect
of computation of BPLRs by banks.
 As components of the BPLR are determined
by the bank itself.

16.  Another issue that is often raised is the
asymmetric downward stickiness of the
BPLRs. This not only raises an issue of equity
but also results in poor transmission of
monetary policy in credit markets.
 The major reasons for downward stickiness is
the large share of deposits contracted at high
rates in the past.

17.  TheBPLR system based on the average costs
incurred by banks on fund-based business
actually reflects the break-even cost for
banks and does not represent “prime
lending” rate in the usual sense of the term
at which banks accommodate their highly
rated/most creditworthy borrowers.

19.  Mumbai, July, 7: State Bank of India (SBI) The
largest bank of Asia, has revised the
benchmark prime lending rate, base rate and
deposit rates upwards to follow the rate
hikes announced by RBI in its last policy
review.
 SBIhas revised the Benchmark Prime Lending
Rate and Base Rate upwards by 25 bps in
anticipation of rising interest rate in coming
months.

20.  The bank has informed BSE that it has
revised the Benchmark Prime Lending Rate
by 25 bps from 14.00% p.a. to 14.25% p.a.
 State Bank of India has also informed BSE
that the Bank has revised the Base Rate
upwards by 25 bps from 9.25% p.a. to 9.50%
p.a.
 SBI revises upwards the 'Deposit Rates' up to
100 bps means by 1 percent in some
maturities, effective from July 11, 2011.All
the changes are effective from July 11, 2011.

21.  The new rate hike by the country's leading lender will
increase the EMI of home, Auto, Personal, and other
advances as well.
 SBI has also decided to waive the penalty for
premature withdrawal of deposits up to 90 days for
retail depositors. At the same time it has decreased
penalty to 0.50 percent from 1 percent for premature
withdrawal of other deposits beyond 90 days.
 Last week, several banks, including major private
lender ICICI Bank, Canara Bank , Bank of Baroda,
IOB, Dena, have already raised their lending rates by
25 bps.

22.  The Reserve Bank has received several
representations on the arbitrariness of
resetting the lending rates on loans and the
benchmark rates used for pricing floating
rate products. Many banks charge lending
rates with reference to benchmarks which
are internal and non-transparent.

23.  In addition, provisions on conditional
resetting interest rates are placed as „force
majeure’ in loan covenants thereby making
the terms of contract non-transparent for
the borrower. This practice has added further
opaqueness in the setting of lending rates
since the re-pricing is generally arbitrary and
not with reference to a transparent publicly
known benchmarks.