Due to the current economic slowdown most banks had stopped giving out Sub-PLR loans for some time. With improved liquidity conditions, banks have come back on the trend of disbursing loans at discounted rate that is below benchmark prime lending rates (BPLR). Majority of fresh loans, around 65% to 70% are being disbursed at sub-PLR rates now as opposed to the situation some time back.
If you are in any kind of business and frequently take loans from banks to fulfill your financial needs, you may have come across terms such as BPLR or Sub-PLR. Even if you are not a businessman you may have heard about the term when applying for loans or when reading about interest rate and repo cuts. Before we can start discussing Sub-PLR we need to understand what BPLR is?
What is BPLR?
By definition, the Benchmark Prime Lending Rate (BPLR), is the reference interest rate based on which a bank lends to its credit worthy borrowers. Normally, loans are given out a little more or a little less that this reference interest rate. All retail loans are linked to the BPLR or the PLR. So, any change in it will affect the cost at which you take a loan from a bank.
The RBI does not set these rates, but in a broad way stipulates the interest rates in the economy.
The PLR is influenced by RBI’s policy rates – the repo rate and cash reserve ratio – apart from the bank’s policy. In simple words, availability of funds in the banking system and demand for credit by consumers (both retail and industrial) determine what the BPLR should be.
What is a ‘spread’?
Spread is the difference between the BPLR (prime lending rate) and the loan interest rate. This can be “x” plus or “x” minus the BPLR rate fixed by the bank.
What are Sub-PLR Loans?
Some banks provide loans and advances at a rate lower than the BPLR (Prime Lending Rate) of the bank to customers availing finance for business purposes or short term funds for various needs. (usually large companies, major exporters and some individuals etc.) with high credit ratings. This enables them to attract bigger clients, offer bigger amounts of loans since the high credit worthiness is a likely indicator of customers making regular payments and in turn this helps the banks to increase business and get more profits from their loans.
What is current scenario for Sub-PLR loans?
Due to the current economic slowdown most banks had stopped giving out Sub-PLR loans for some time. With improved liquidity conditions, banks have come back on the trend of disbursing loans at discounted rate that is below benchmark prime lending rates (BPLR). Majority of fresh loans, around 65% to 70% are being disbursed at sub-PLR rates now as opposed to the situation some time back. This trend is prevalent currently to encourage credit growth, which has been facing a slump as an after effect of the global recession.
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The whole concept of PLR in India is topsy turvy. Prime Lending Rate by its common sense meaning as well as well defined in OECD countries is that which banks give to its best borrowing customers. In effect, by conduct Banks arrive at that rate which their "prime" customers are eligible to have from their banks. Usually prime lending rates are the lowest among lending rates and the highest lending rate is usually considered to be 4 per cent higher than the prime lending rate in each bank.
In practice, in India banks fix a BPLR which is higher than the lending rates they normally have. This practice is intriguing. Why should Indian banks fix a Prime Lending rate and then lend lower to it at all?
There is a clear abuse of the English language and nomenclature used in banking worldwide when the word sub is used. A word sub-prime indicates that it is lower than the standard. This article implies that when banks lend at sub-plr rates they are lending at lower rates than banks.
Actually, sub-plr rates when expanded means sub-prime rates. Sub-prime in USA means below standard and here sub prime means better rates i.e. lower rates.
This needs to be corrected once for all if necessary with the Regulator's intervention. Prime should be restored to its true meaning and so should subprime.
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