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Money > Business Headlines > Report October 29, 2002 | 1456 IST |
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Banks asked to pare spreads over PLR
The central bank has said that very wide spreads over PLR provide opportunities for non-transparency. "In order to ensure appropriate pricing of loans, banks are encouraged to review both their prime lending rates and spreads and align spreads within reasonable limits around PLR subject to approval of their boards," the central bank said on Tuesday. The Monetary and Credit Policy of April 2002 had indicated that spreads over PLR of some banks are substantial. Banks were, therefore, urged to review the maximum spreads over PLR and reduce them wherever they were unreasonably high, Jalan said. A few banks have marginally reduced their maximum spreads. "The Reserve Bank has been monitoring maximum spread over PLR and also the range of lending rates at which maximum business is contracted under a new information system. "According to the latest available information, both PLR and spread are varying widely across banks/bank-groups. Ideally, in a competitive market, PLRs among various banks/bank-groups should converge to reflect credit market conditions. "Moreover, spreads around the PLR should be reasonable. In the current environment of low inflation, unreasonably wide spreads could adversely affect the overall credit portfolio of banks," Jalan said. The recent policy statements have been drawing attention to the factors causing rigidities in the structure of interest rates, particularly in the lending rates of commercial banks, the RBI release said. The factors include:
The net NPAs as a percentage of advances also declined from 6.7 per cent to 5.8 per cent during the same period. The non-interest operating expenses of public sector banks as a percentage of assets declined from 2.72 per cent in 2000-01 to 2.29 per cent in 2001-02. The overall cost of funds of public sector banks has also declined from 6.8% in 2000-01 to 6.7 per cent in 2001-02. This is an encouraging development in so far as it has opened up the scope for further improvement in these parameters and in bringing about a reduction in transaction costs and in lending rates of commercial banks. "The annual policy statement of April 2002 had reviewed the issue and made certain suggestions, which include:
In order to further improve flexibility, banks have been given freedom to decide the period of reset on variable rate deposits. According to the latest available information, some banks have already introduced variable rate deposits. Although the depositors response to variable rate deposits has not been very favourable so far, "banks are encouraged to make efforts to popularise flexible deposit schemes among the depositors as these are in the long-term interest of banks as well as depositors," the RBI said in its credit policy review issued today. ALSO READ:
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